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How does inflation work? And why prices might never drop back down
Yahia Barakah October 28, 2025 at 8:39 PM
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How does inflation work? And why prices might never drop back down (Hispanolistic via Getty Images)
Annual inflation reached 3% in September, marking a six-month streak during which price increases accelerated. That means your living costs aren't just rising, they're rising faster as more tariff impacts work their way through to what you pay at the register.
The Bureau of Labor Statistics released this inflation figure in its latest consumer price index (CPI) report. This monthly report tracks how much more or less you're paying for everyday goods and services compared to a month and a year ago. The bureau calculates this by monitoring prices across hundreds of items that consumers regularly pay for, from groceries and gas to rent and medical care.
But what does this inflation percentage actually mean? And will prices drop back down anytime soon? More importantly, what can you do right now to protect your wallet from these rising costs?
How does inflation work?
Inflation measures how fast prices rise over time, gradually weakening your dollar's buying power. The 3% annual rate compares prices in September 2025 to those in September 2024. When inflation runs at 3% annually, something that cost $100 last year now costs $103.
How inflation compounds against you
Each year's price increases build on top of the previous year's increase. Annual inflation ran at 2.4% in September 2024. Then it was at 3% in September 2025. That means prices have climbed a cumulative 5.5% over the past two years.
Put another way, an item that cost $100 in September 2023 jumped to $102.40 by September 2024. That same item cost roughly $105.50 in September 2025. The increases compound, and your purchasing power shrinks with each passing year unless your income keeps pace.
This compounding effect explains why even moderate inflation feels painful over time. A 3% increase might sound small for one year. But sustain that rate for five years, and prices climb 16%. Your budget needs to grow by roughly that much just to maintain the same purchasing power.
Your personal inflation rate
The government's inflation rate accounts for price changes across thousands of products, but your actual inflation rate depends on what you buy. Spend heavily on categories with above-average price increases, and inflation hits you harder than the official rate suggests.
For example, health care costs typically outpace general inflation, while rent in many cities has jumped faster in recent years than the national average. This means your personal inflation rate can run higher if larger portions of your budget go to housing or health care.
Will living costs and prices return to normal?
During his 2024 campaign, President Trump repeatedly promised he would immediately bring prices down once he takes office, pledging, "When I win, I will immediately bring prices down, starting on Day One."
Inflation had dropped to 2.3% by April 2025. But since then, the trend reversed. After President Trump imposed tariffs of 10% to 50% and more on nearly everything the U.S. imports in April, inflation climbed back up. From 2.4% in May to 2.7% in June and July, reaching 3% by September 2025.
But will prices return to normal one day? Well, it depends on what you consider normal.
What are "normal" prices?
Nowadays, when people say they want prices to return to normal, they usually mean pre-pandemic levels, when eggs cost $1.50 instead of $4 and shopping for groceries didn't require a small loan.
But the uncomfortable truth is that in a healthy economy, prices almost never go backward to previous levels. They just rise more slowly.
Inflation works like climbing a mountain. The inflation rate shows how fast you're ascending. When inflation drops from 9% to 3%, you're still moving upward, just at a gentler pace. Lower inflation doesn't mean you're walking back down to where you started.
Even 0% inflation doesn't mean things get cheaper. It simply means that prices remain stable from one year to the next.
Why deflation sounds good but isn't
The only way prices can broadly decrease is through deflation, which occurs when inflation turns negative. During a period of deflation, your dollar may buy more next month than it does today. Sounds great, except it brings its own set of problems that can be much worse than modest inflation.
When people expect prices to drop further, they tend to delay their purchases. Why buy a car today if it'll cost less in six months? This reduces overall spending, which forces businesses to cut production and lay off workers. Less spending leads to lower demand, which pushes prices down even more, creating a downward spiral.
Deflation hits anyone with debt particularly hard. When prices and wages fall, the real value of your debt stays the same or increases. Your mortgage payment doesn't shrink just because you're earning less. This can lead borrowers to cut spending even more to meet their debt obligations.
During the Great Depression from 1929 to 1933, consumer prices fell 25% and the deflation rate hit 10% in 1932. Unemployment soared to 25%, and around 9,000 banks failed as people and businesses struggled to repay debts that remained unchanged while their incomes plummeted.
🔍 Learn more: 8 money lessons from the Great Recession that apply today
How the Federal Reserve responds to inflation
The Federal Reserve has two main jobs, known as its dual mandate. Keeping prices stable and Americans employed. These goals often pull in opposite directions, forcing the Fed to make tough choices.
When inflation is picking up pace
When inflation runs too hot, the Fed typically raises interest rates. Higher rates make borrowing more expensive for businesses and consumers, which slows spending and investment. Less spending means lower demand for goods and services, which eventually cools price increases.
But raising rates also makes it harder for businesses to expand and hire workers. Push rates too high, and you risk triggering a recession with mass layoffs.
When unemployment is rising
When unemployment threatens the job market, the Fed cuts rates to make borrowing cheaper. This encourages businesses to invest and hire, putting more people back to work. But lower rates can also fuel inflation by making spending easier.
Right now, the Fed faces an unusual challenge. The central bank had made solid progress controlling inflation, bringing it down from a peak of 9.1% in 2022 to 2.3% by April 2025. But President Trump's tariffs and trade policies reignited price pressures and eroded those efforts.
Inflation climbed for six consecutive months, hitting 3% in September 2025. That puts it well above the Fed's 2% target, as it continues to move in the wrong direction. At the same time, the job market has significantly weakened, with hiring grinding to a near halt in August of this year.
Most economists expect the Fed to pay closer attention to the weakening labor market as the central bank's focus shifts from fighting rising prices to protecting jobs.
🔍 Learn more: How Fed rate decisions affect your finances
When deflation is depressing the economy
During deflation, the Fed's options dramatically shrink because interest rates can't drop much below zero. The central bank can try other tools, like buying government bonds to pump money into the economy or encouraging banks to lend more. But these measures work more slowly and less predictably than interest rate cuts.
That's partly why deflation proved so difficult to escape during the Great Depression. Once the deflationary spiral starts, the Fed's usual playbook loses its power.
🔍 Learn more: 5 moves you should NOT take during a recession
5 smart tactics to protect your money from inflation
Inflation hits everyone, but these smart money moves can help you stay ahead of rising prices. Here's where to start.
1. Move your cash to high-yield accounts
Your savings in a basic bank account earning 0.01% APY lose value every month due to inflation. High-yield accounts flip the script by actually paying meaningful interest on the same cash.
Look for accounts that don't trap your money. The best high-yield savings accounts let you access funds quickly through linked checking accounts, debit cards or same-day transfers. You get inflation protection without sacrificing flexibility when unexpected expenses hit.
For money you won't need soon, certificates of deposit lock in guaranteed returns even as rates drop. Online banks typically offer the highest rates on both options while charging zero monthly fees.
🔍 Learn more: My high-yield savings still beats inflation and traditional banks — here's how
2. Rethink your grocery strategy
Rising food prices hit hardest because you can't skip eating. But you can change how you shop.
Stop comparing sticker prices and start checking unit pricing instead. That small print on shelf tags shows the real cost per ounce or pound, making it easy to spot which size actually saves money. Watch for shrinkflation with your favorite brands. Companies quietly reduce package sizes while keeping prices the same, meaning you're paying more for less without realizing it.
Warehouse clubs often offer better per-unit pricing, although you need to account for the membership cost and use the items you buy before they expire. Adding rewards credit cards and cashback apps can return a percentage of your spending and help offset price increases.
🔍 Learn more: 7 grocery staples you're wasting money on and what to buy instead
3. Regularly update your budget
Inflation makes last year's budget obsolete. Your grocery line item might stay at $400, but you're actually getting less food for that money.
Review spending every few months instead of annually. Budgeting apps can help you track when regular purchases start costing more or lasting less time, making it easier to spot where inflation hits your wallet hardest.
The 50/30/20 budgeting rule provides a simple framework. Start by allocating 50% for essentials, 30% for wants and 20% for savings and debt. From there, personalize this framework by adjusting it to your financial obligations and needs.
🔍 Learn more: 5 popular budgeting strategies and how to find the best fit
4. Cut the subscription creep
Small monthly subscriptions can add up quickly, especially when prices continue to rise. Review what you're actually using and cancel the rest.
Streaming services, app subscriptions, delivery memberships and other recurring charges can easily add up to $100 to $200 per month. When inflation squeezes your budget everywhere else, these discretionary expenses are the easiest place to find breathing room.
5. Negotiate your recurring bills
Insurance, internet and phone services all compete for your business, but most people never ask for a better deal.
Start with car and home insurance. Get quotes from at least three competitors to see what's available. The price differences can be substantial, and switching takes less time than you'd think.
Internet and phone companies often run promotions and offer their best rates to new customers. Some providers sweeten the deal with gift cards, prepaid credit or waived installation fees when you switch. You may actually make money by switching carriers while also lowering your monthly bill.
🔍 Learn more: 20+ clever ways to stretch your dollar (that actually work)
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Source: "AOL Money"
Source: ShowBiz MAG
Published: October 28, 2025 at 05:18PM on Source: ShowBiz MAG
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