Why is inflation low when prices of goods and services high
Executive summary
Headline inflation in the U.S. has moderated to roughly the mid‑2 percent range—official CPI was 2.7% year‑over‑year in December [1][2]—even as many households report painful, persistent price pressures for groceries, rents and selected goods; that gap reflects measurement choices, timing (tariff pass‑through and data quirks), and distributional effects across the basket of spending [3][4][5]. Policymakers and markets read a different signal—core PCE and other measures trend toward 2.4–2.8% in many forecasts—so inflation can be “low” in aggregate statistics while lived costs remain high for large shares of the population [6][7].
1. Why the headline number can look calm even when bills feel steep
The monthly CPI rose modestly in December after a government shutdown created irregularities earlier in the year, leaving the official 12‑month read at 2.7%—a level unchanged from November [1][3][2]; but that aggregate masks variation: some subcomponents (food, energy excluding gasoline, housing in many metro areas) remain elevated and disproportionately affect household budgets, so “prices are high” for many even while the overall index is steady [5][8].
2. Composition and measurement: the fog around “core” vs “headline”
Economists and the Fed focus on core PCE (which strips volatile food and energy) and other core measures; those have recently been reported around the mid‑2 percent range but are expected by many forecasters to remain slightly above the Fed’s 2% target through 2026, not plunging immediately to target [6][7]. Different gauges use different baskets and weights, so a modest headline CPI or PCE number does not mean every price is rising slowly—services and housing often move differently from durable goods and energy [3][9].
3. Tariffs, pass‑through and the timing that amplifies perception
Recent tariff policy and “front‑loading” pushed up prices for many durable goods in 2025; forecasters warn that pass‑through effects can continue to lift consumer prices into 2026 as those cost increases work through supply chains and inventories, so elevated sticker prices seen in stores may be a lagged manifestation of policy rather than a reflection of accelerating demand‑side inflation right now [4][10][1].
4. Distributional reality: where inflation hurts most
Analysts warn that inflation acts as a regressive tax and that even moderate aggregate inflation can be devastating for low‑ and middle‑income households when essentials—food, rent, energy—rise faster than the headline index [11][12]. Surveys also show consumers expect higher prices to continue, which colors everyday experience and political narratives even if the technical 12‑month rate looks “low” [8][12].
5. Policy context and competing narratives
The Federal Reserve and private forecasters are split on timing for rate cuts and the path of inflation: some expect gradual easing while others flag risks that wage‑driven services inflation could persist and keep inflation above target longer [13][14][9]. Political actors have incentives to emphasize one frame over another—pointing to “low inflation” to argue for rate cuts, or highlighting high living costs to press for policy action—so reading statements requires accounting for those agendas [5][12].
6. What to watch next
Key signals include upcoming CPI and PCE releases (January and monthly thereafter), the evolution of food, energy and housing components, whether tariff pass‑through abates, and the Fed’s reaction to labor market signs; forecasters currently expect a gradual cooling toward the mid‑2 percent range but caution that the path is not guaranteed and distributional pain can persist even as headline rates fall [3][6][7].