By Mike Walden
Inflation continues to be one of the top issues in the country. Although some prices have fallen, many are still rising and, what’s more troubling, are they are rising at a faster rate. Households’ hopes of prices returning to pre-pandemic levels have so far not been fulfilled.
So, is the direction of inflation good or bad for consumers? I’ll try to give you the facts and then let you decide.
It is important to note there are two reasons to watch the inflation rate. The first reason is obvious. Inflation measures the rate at which prices are increasing. The faster prices rise, the lower our standard of living because households can’t afford to buy as much. The only exception is if household income rises at a similar or faster rate than prices.
The second reason to follow inflation is it will give you a clue as to where interest rates are headed. When inflation moderates, two forces occur that can put downward pressure on interest rates. First, lenders will not need to charge as much for the “inflation premium” included in interest rates. When lenders make loans, they must be compensated for the declining value of dollars repaid in the future. If those dollars are expected to decline less in the future due to lower inflation, then borrowing rates will be lower.
Second, Federal Reserve officials are more likely to lower their interest rates when the inflation rate is lower. Although the Federal Reserve doesn’t control other interest rates, those rates tend to move in the same direction as the Federal Reserve’s rates.
The national inflation rate is based on a comparison of weighted average of all prices over a period of time, where prices more important to consumers’ budgets receive a higher weight in the average. I think a year-over-year time period is the best comparison because it gives a longer perspective, and seasonal differences in prices are not a factor.
In looking at the trends in the year-over-year all-item inflation rate, there is good news and bad news. The good news is the latest year-over-year inflation rate for July shows a 2.7% increase. This is much less than the 9.1% rate for June 2021 to June 2022. The bad news is the most recent rate is higher than the 2.3% rate between April 2024 and April 2025. This means we’ve recently been in a rising inflation rate period rather than a declining inflation rate period. Most economists point to tariffs as the cause. Because tariffs increase the price of imports, and because tariffs are paid by the U.S. importers, some companies are motivated to pass those tariff costs on to consumers through higher prices.
Let me be more detailed about inflation by examining price trends for specific categories of products, such as essentials like food, shelter and energy.
Inflation for food has followed the same pattern as all-item inflation, but stronger. In August 2022 the food year-over-year inflation rate was 11.4%. By October 2024 the rate had fallen to 2.1%, and today the rate has increased to 3%, higher than the overall 2.7% rate.
The federal government’s measure of shelter prices includes a combination of ownership and rental dwellings, and for ownership dwellings it accounts for both the purchase price of the home as well as the financing costs. The recent peak year-over-year inflation rate for shelter was in August 2023 when shelter prices increased 8.2% from the previous August. Since then, the inflation rate of shelter prices has steadily declined to today’s year-over-year rate of 3.7%. Again, this means shelter prices are still rising, but at a much slower rate than two years ago.
The best recent news on inflation is gas prices. In the summer of 2021 gas prices were rising, in some cases by 50% on a year-over-year basis. But since the summer of 2023, gas prices have gone in the opposite direction, sometimes dropping as much as 25% year-over-year. Other energy prices have followed the same pattern, but with less volatility.
The conclusion is, inflation is still with us, as it usually is. For most products and services, prices are always rising. How fast is the question. Fortunately, with the inflation rate much lower than it was just after the pandemic, the average worker’s wages have been keeping pace with price gains.
But some economists worry about the future, and the reason is one word: tariffs. By making imports more expensive, tariffs are creating the potential for domestic companies to increase the prices they charge consumers. This hasn’t yet happened in a widespread way with less than one-fourth of businesses raising prices due to tariffs. Yet this may change because currently prices paid by retailers for inputs are rising much faster than prices charged by retailers.
Along with consumers, the Federal Reserve is also closely watching trends in the inflation rate. To lower their interest rates — with other rates usually following — Federal Reserve officials have to be convinced the inflation rate is at least contained. If the inflation rate is rising or is higher than desired, Federal Reserve is worried that if they lower interest rates and stimulate more borrowing and spending, the surge in buying could push up prices at an even faster rate.
Hence, the eyes of consumers, as well as government officials such as those in the Federal Reserve, will be on tariffs, potential tariff agreements and whether more companies begin to increase their prices to offset tariff costs. Many think agreements to lower tariffs would be the best outcome in terms of inflation.
Inflation is always an issue of how much is occurring, not whether it is occurring. Inflation rates are much lower today than they were immediately after the pandemic. But recently the rates have begun to trend up, not down. Can this be reversed? You decide.
Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.
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