No, Prices Aren't Going Back

Every time we hear that inflation is cooling down, there's this little voice in the back of our heads whispering: "Maybe things will get cheaper again." Maybe rent will come down. Maybe we'll catch a break.

I hate to be the bearer of bad news, but that's not how this works. Those price increases we've lived through? They're sticking around. And it's exactly how the entire system is supposed to work.

Inflation is a one-way street (upward)

We intuitively think of inflation as something temporary, something that comes and goes. But inflation measures the rate of change in prices, not prices themselves. It’s like the speedometer in a car rather than the odometer.

When inflation falls from 7% down to 2%, prices don’t reverse. They just stop rising as quickly. Your groceries remain expensive, just not increasingly expensive at the same rate.

For example, in the 1970s and early 1980s, inflation surged dramatically across developed economies, notably in the United States. Central banks eventually brought inflation rates down significantly by the mid-1980s, but here’s the catch: while the inflation rate recovered, prices never reverted. This pattern has repeated across different countries and time periods. Once prices establish a new level, they tend to remain there even after the original inflationary pressures subside.

A return to pre-shock price levels would require sustained deflation, a scenario that central banks view as far more dangerous than elevated prices.

Why central banks dread deflation

Deflation creates a self-reinforcing cycle of economic decline. When prices fall consistently, consumers delay purchases, expecting better deals tomorrow. This reduction in demand forces businesses to cut production and employment, which reduces incomes and spending power, creating further downward pressure on prices.

The debt burden becomes particularly problematic during deflation. Mortgages and loans become more expensive in real terms as the currency gains purchasing power. For fixed rate loans, that's even worse, because deflation would mean that the real interest rate would also increase.

Japan's experience in the 1990s demonstrates these dynamics clearly. Despite decades of monetary stimulus, the country struggled with persistent deflation and economic stagnation, a fate that other central banks are determined to avoid.

Prices are “sticky” by design

When an inflationary shock occurs, it fundamentally resets the baseline for prices. Even if the shock itself is temporary, like a one-off surge in energy prices or a short-term disruption in supply chains, the broader economy quickly adapts. Contracts, wages, and consumer expectations adjust rapidly, embedding the higher prices into every transaction and future agreement.

This creates a permanent shift. Prices might stabilise, but they stabilise around a new, elevated equilibrium rather than returning to their previous levels.

Consider a thought experiment about market behaviour. If an inflationary shock were genuinely temporary (completely unexpected, strictly time-limited, and credibly guaranteed never to recur), bond markets would theoretically have no reason to reprice. Bond yields wouldn't need to rise to compensate for long-term inflation risks that don't exist. The bonds would continue trading based on unchanged long-term inflation expectations despite the immediate change in real purchasing power.

Yet in this theoretical scenario, consumer prices would almost certainly remain elevated after the shock passed. The reason reveals a fundamental difference between financial markets and the real economy.

Bond markets can maintain forward-looking valuations based on future inflation expectations, adjusting yields only when those long-term expectations change. But consumer prices operate within existing economic relationships, such as employment contracts, lease agreements and supplier arrangements, that have already adapted to higher costs.

Central banks intentionally reinforce this new price baseline rather than pushing back against it. They do this by explicitly targeting stable, positive inflation (around 2% in most developed economies) to avoid deflationary spirals. This ensures that a temporary shock, once integrated into wage and price levels, becomes the new economic reality.

This expectation becomes self-fulfilling as businesses and consumers modify their behaviour based on the assumption that higher prices represent the new normal rather than a temporary aberration.

There is no “magic reset” coming

The bottom line is pretty stark: if you've been waiting for prices to come back down to pre-pandemic levels, you're going to be waiting a very long time. Like, potentially forever.

That $Y loaf of bread that used to cost $X? That's just what bread costs now. Your rent that jumped 30%? That's the new baseline. The good news is that inflation is cooling, so things should stop getting more expensive so quickly.

The real relief, if it comes at all, will have to come from incomes catching up. Companies will need to pay more, or people will need to find better jobs, or productivity will need to improve enough to make the new prices feel more manageable.

The reset button we're all looking for? It doesn't exist. What we've got instead is the slow, grinding work of rebuilding our financial lives around this new reality. It's not fun, but it's where we are.