Why Everything Costs More (and Sometimes Less)
Inflation can slow while prices still feel brutal. Learn the difference between the rate of price increases and the price level—and what CPI and PCE really show.
By TheMurrow Editorial
January 26, 2026
Key Points
- 1Recognize the trap: inflation is the rate of price increases, while daily pain comes from a higher price level that rarely falls.
- 2Decode the headlines: CPI is most quoted, but the Fed targets PCE—a broader measure that accounts for substitution and different weights.
- 3Follow the drivers: shelter, food, and energy can rise even with “lower inflation,” and housing’s huge CPI weight keeps pressure feeling persistent.
The strangest part of living through “lower inflation” is that nothing feels lower. Groceries still sting. A night out costs more than you remember. Rent renewals arrive like bad news in an envelope.
Headlines insist inflation is easing—and, by the standard definition, they’re right. Yet many households hear the word inflation and think it means one thing only: prices are high. The gap between those two ideas—the rate of price increases versus the level of prices—is where public frustration lives.
Here’s the inconvenient truth that clears up much of the confusion: when inflation falls, prices usually don’t fall. They simply rise more slowly. For prices to broadly move down, the economy would need deflation—and despite the seductive sound of “cheaper,” deflation is historically more menace than mercy.
“When inflation slows, the economy doesn’t rewind. It just stops speeding up.”
— — TheMurrow Editorial
What follows is a guide for intelligent readers who want to understand why the official numbers can look reassuring while daily life still feels expensive—and what the two main U.S. inflation gauges are actually telling us.
Key points
Separate the rate from the level: lower inflation usually means prices rise more slowly—not that they fall.
Learn the difference between CPI and PCE: the public follows CPI, but the Fed targets PCE, which weights spending differently.
Watch essentials and housing: shelter is over a third of CPI, so rent/OER can keep inflation feeling “stubborn” even as headlines improve.
Learn the difference between CPI and PCE: the public follows CPI, but the Fed targets PCE, which weights spending differently.
Watch essentials and housing: shelter is over a third of CPI, so rent/OER can keep inflation feeling “stubborn” even as headlines improve.
Inflation vs. deflation: the definitions people mix up
Inflation is not “prices are high.” Inflation is a broad, sustained rise in the overall price level—meaning your dollar buys fewer goods and services over time. In news coverage, it’s usually expressed as a percentage change over the past 12 months in an index like the Consumer Price Index (CPI) or the Personal Consumption Expenditures index (PCE).
Deflation is the opposite: a broad, sustained decline in the overall price level—essentially negative inflation. A dollar buys more over time. That sounds pleasant until you remember why sustained deflation tends to happen: weak demand, falling incomes, rising real debt burdens, and a reluctance to spend because tomorrow might be cheaper.
Deflation is the opposite: a broad, sustained decline in the overall price level—essentially negative inflation. A dollar buys more over time. That sounds pleasant until you remember why sustained deflation tends to happen: weak demand, falling incomes, rising real debt burdens, and a reluctance to spend because tomorrow might be cheaper.
Disinflation isn’t deflation—and it’s the headline trap
A large share of confusion comes from a third term: disinflation. Disinflation means inflation continues, but at a slower pace—say, dropping from 6% to 3%. Prices are still rising; they’re just rising less quickly. People feel no relief because the price level remains elevated and keeps inching up.
Another common misunderstanding is mistaking relative price changes for inflation. Even in a stable economy, some prices rise while others fall. A cheaper smartphone and a pricier insurance premium can coexist without implying broad-based inflation or deflation.
Practical takeaway: If you’re waiting for “inflation to go away” so prices return to what you paid in 2019, you’re really hoping for deflation. Policymakers generally try to avoid that outcome.
Another common misunderstanding is mistaking relative price changes for inflation. Even in a stable economy, some prices rise while others fall. A cheaper smartphone and a pricier insurance premium can coexist without implying broad-based inflation or deflation.
Practical takeaway: If you’re waiting for “inflation to go away” so prices return to what you paid in 2019, you’re really hoping for deflation. Policymakers generally try to avoid that outcome.
Key Insight
If inflation falls, prices usually don’t. They rise more slowly. Broad price declines require deflation, which policymakers generally try to avoid.
The two inflation yardsticks Americans see—CPI vs. PCE
The U.S. runs on two main inflation gauges that often tell similar stories with different emphases. Understanding the difference helps readers decode why one report triggers market panic while another barely lands.
CPI: the most visible, most quoted number
CPI (Consumer Price Index) is produced by the U.S. Bureau of Labor Statistics (BLS). It measures price changes for a basket of goods and services purchased by urban consumers. Because it’s timely and widely covered, CPI tends to become the public’s inflation reality—even when other measures differ.
The most recent CPI snapshot in the research comes from December 2025 CPI-U:
- +0.3% month over month (seasonally adjusted)
- +2.7% year over year (not seasonally adjusted)
(Source: BLS CPI news release archived January 13, 2026)
The BLS also flagged where the pressure came from. In December, shelter was the largest contributor to the monthly increase, rising 0.4%. Food rose 0.7%, and energy rose 0.3%.
Those category details matter because people experience inflation unevenly. A household that spends heavily on food and rent will feel a different economy than one spending more on discretionary goods.
The most recent CPI snapshot in the research comes from December 2025 CPI-U:
- +0.3% month over month (seasonally adjusted)
- +2.7% year over year (not seasonally adjusted)
(Source: BLS CPI news release archived January 13, 2026)
The BLS also flagged where the pressure came from. In December, shelter was the largest contributor to the monthly increase, rising 0.4%. Food rose 0.7%, and energy rose 0.3%.
Those category details matter because people experience inflation unevenly. A household that spends heavily on food and rent will feel a different economy than one spending more on discretionary goods.
+2.7%
December 2025 CPI-U year over year (not seasonally adjusted). A “lower” rate can still mean a high price level.
+0.3%
December 2025 CPI-U month over month (seasonally adjusted). A small monthly rise can still sting when essentials lead.
PCE: the Fed’s preferred gauge—and why
PCE (Personal Consumption Expenditures price index) is produced by the U.S. Bureau of Economic Analysis (BEA). It often gets described as the Federal Reserve’s preferred inflation gauge for three reasons rooted in measurement:
- PCE draws from a broader set of data sources (including business surveys).
- It better reflects substitution—how consumers switch to cheaper alternatives when prices shift.
- It uses a different weighting system than CPI.
The Federal Reserve also explicitly frames its long-run inflation objective—2%—in terms of PCE inflation. That matters because “inflation is above target” or “inflation is near target” is not merely academic; it informs interest-rate decisions that ripple into mortgages, credit cards, and job markets.
BEA’s core PCE series (excluding food and energy) showed late-2025 year-over-year readings in the high-2% range, including 2.8% in November 2025.
- PCE draws from a broader set of data sources (including business surveys).
- It better reflects substitution—how consumers switch to cheaper alternatives when prices shift.
- It uses a different weighting system than CPI.
The Federal Reserve also explicitly frames its long-run inflation objective—2%—in terms of PCE inflation. That matters because “inflation is above target” or “inflation is near target” is not merely academic; it informs interest-rate decisions that ripple into mortgages, credit cards, and job markets.
BEA’s core PCE series (excluding food and energy) showed late-2025 year-over-year readings in the high-2% range, including 2.8% in November 2025.
“CPI tells you what prices did. PCE is closer to what the Fed thinks prices mean.”
— — TheMurrow Editorial
Practical takeaway
When you see “inflation is 2.7%,” check which inflation. CPI and PCE are cousins, not twins—and policy is often keyed to PCE.
Why “inflation is down” still feels like a pay cut
Even when inflation cools, most families don’t feel the relief because the key variable in everyday life is the price level, not the rate of change. If prices rose sharply for two years and then inflation returns to a more normal pace, households are still stuck living at the new, higher plateau.
A simple way to frame it: if your rent went up and then stopped skyrocketing, your monthly bill is still higher. The pain doesn’t disappear; it just stops getting worse as quickly.
A simple way to frame it: if your rent went up and then stopped skyrocketing, your monthly bill is still higher. The pain doesn’t disappear; it just stops getting worse as quickly.
Category inflation hits different households differently
Inflation is an average. Averages flatten lived experience. Someone with a paid-off mortgage experiences housing costs differently than a renter. A family with kids feels food inflation differently than a single professional who eats out less. The index is national; budgets are personal.
CPI’s December 2025 report gives a clean illustration. Shelter, food, and energy all rose in the month—exactly the set of categories that tend to dominate dinner-table conversations. That doesn’t mean other categories didn’t behave differently, but it does explain why people can look at a 2.7% year-over-year inflation rate and still feel squeezed.
Practical takeaway: When inflation falls, the most meaningful question becomes: Which categories are still rising quickly, and do they dominate my budget?
CPI’s December 2025 report gives a clean illustration. Shelter, food, and energy all rose in the month—exactly the set of categories that tend to dominate dinner-table conversations. That doesn’t mean other categories didn’t behave differently, but it does explain why people can look at a 2.7% year-over-year inflation rate and still feel squeezed.
Practical takeaway: When inflation falls, the most meaningful question becomes: Which categories are still rising quickly, and do they dominate my budget?
Housing: the heavyweight that distorts the whole picture
If you want one reason inflation feels stubborn, start with housing. In the CPI basket, shelter is enormous, and the BLS publishes the weights clearly:
- Shelter relative importance (Dec 2024): 35.483%
- Owners’ equivalent rent (OER): 26.282%
- Rent of primary residence: 7.499%
(Source: BLS CPI factsheet on OER and rent)
Those are not small shares. Shelter alone accounts for more than a third of the CPI basket. If shelter inflation runs hot, it can keep the overall inflation number elevated even when other prices behave.
- Shelter relative importance (Dec 2024): 35.483%
- Owners’ equivalent rent (OER): 26.282%
- Rent of primary residence: 7.499%
(Source: BLS CPI factsheet on OER and rent)
Those are not small shares. Shelter alone accounts for more than a third of the CPI basket. If shelter inflation runs hot, it can keep the overall inflation number elevated even when other prices behave.
35.483%
Shelter’s relative importance in CPI (Dec 2024). When shelter rises, the headline inflation rate can stay elevated.
Why housing inflation is confusing: CPI isn’t a home-price index
Many readers reasonably ask: why doesn’t inflation track home prices the way Zillow does? The answer is methodological. CPI generally does not treat buying a home as everyday consumption. Instead, it measures the cost of the housing service—the “shelter” you consume over time.
For homeowners, the key concept is Owners’ Equivalent Rent (OER)—an estimate of what a homeowner would pay to rent a similar home. OER is not the same thing as a mortgage payment or a home’s sale price. It’s designed to capture the cost of shelter services, but it can feel abstract to households staring at real-world monthly payments.
For homeowners, the key concept is Owners’ Equivalent Rent (OER)—an estimate of what a homeowner would pay to rent a similar home. OER is not the same thing as a mortgage payment or a home’s sale price. It’s designed to capture the cost of shelter services, but it can feel abstract to households staring at real-world monthly payments.
Case study: the renter vs. the homeowner
Consider two neighbors. One rents, one owns.
- The renter feels inflation immediately through rent of primary residence, which is a direct part of CPI.
- The homeowner might experience housing costs through mortgage rates, insurance, taxes, and maintenance—yet CPI’s shelter measure emphasizes OER, not the mortgage payment itself.
Both households feel pressure, but in different channels. When headlines say “shelter drove the monthly increase,” that’s not a slogan. The BLS literally noted shelter as the largest contributor to December 2025’s CPI rise, with shelter up 0.4% in the month.
- The renter feels inflation immediately through rent of primary residence, which is a direct part of CPI.
- The homeowner might experience housing costs through mortgage rates, insurance, taxes, and maintenance—yet CPI’s shelter measure emphasizes OER, not the mortgage payment itself.
Both households feel pressure, but in different channels. When headlines say “shelter drove the monthly increase,” that’s not a slogan. The BLS literally noted shelter as the largest contributor to December 2025’s CPI rise, with shelter up 0.4% in the month.
“If shelter is more than a third of the basket, housing doesn’t just influence inflation—it largely writes the story.”
— — TheMurrow Editorial
Practical takeaway
If your budget is housing-heavy—as most are—your personal inflation rate will often be higher than what you’d guess from a single national number.
Why the Fed cares about PCE—and why you should, too
The Federal Reserve’s policy goal is often summarized as “2% inflation,” but the fine print matters: the Fed’s longer-run goal is explicitly framed in PCE inflation. When PCE readings hover in the upper-2% range—as BEA’s late-2025 core readings did—policymakers treat inflation as closer to target than it looked during the peaks of recent years, but not necessarily “done.”
Core inflation: useful, but not your grocery bill
Both CPI and PCE often come with “core” versions that exclude food and energy because those categories can be volatile. Core is useful for detecting underlying trends. It is not, however, a moral statement that food and energy don’t matter.
BEA’s core PCE reading of 2.8% year over year in November 2025 sits uncomfortably close to the Fed’s 2% objective. That closeness can translate into slower moves in interest-rate policy—especially if policymakers believe the remaining inflation is concentrated in categories like services and shelter that may cool slowly.
Multiple perspectives are warranted here:
- The Fed’s case: PCE offers a broader, more behaviorally realistic picture (substitution), and core measures help avoid policy whiplash.
- The household case: Excluding food and energy can sound like excluding the most immediate pain points, even if the statistical rationale is solid.
Practical takeaway: If you want to anticipate rate decisions that affect borrowing costs, you need to track PCE—especially core PCE—not only CPI.
BEA’s core PCE reading of 2.8% year over year in November 2025 sits uncomfortably close to the Fed’s 2% objective. That closeness can translate into slower moves in interest-rate policy—especially if policymakers believe the remaining inflation is concentrated in categories like services and shelter that may cool slowly.
Multiple perspectives are warranted here:
- The Fed’s case: PCE offers a broader, more behaviorally realistic picture (substitution), and core measures help avoid policy whiplash.
- The household case: Excluding food and energy can sound like excluding the most immediate pain points, even if the statistical rationale is solid.
Practical takeaway: If you want to anticipate rate decisions that affect borrowing costs, you need to track PCE—especially core PCE—not only CPI.
2.8%
BEA core PCE year over year in November 2025. Close to (but above) the Fed’s 2% objective framed in PCE terms.
Reading an inflation report like an adult: what to focus on
Inflation coverage often behaves like sports commentary: a single number, a win or loss, and a hot take. Readers deserve better. A useful approach is to treat inflation releases as layered documents.
Start with the year-over-year and the month-over-month
December 2025 CPI-U delivered both:
- +2.7% year over year
- +0.3% month over month (seasonally adjusted)
Year-over-year shows the trend across a full calendar cycle. Month-over-month reveals the latest direction, though it can be noisy. Together they help you avoid overreacting to a single swing.
- +2.7% year over year
- +0.3% month over month (seasonally adjusted)
Year-over-year shows the trend across a full calendar cycle. Month-over-month reveals the latest direction, though it can be noisy. Together they help you avoid overreacting to a single swing.
Look at contributions, not just the headline
The BLS explicitly pointed to the drivers: in December 2025, shelter led the monthly increase, with food and energy also rising. That immediately tells you whether inflation pressure is concentrated in essentials.
Know the calendar: inflation is a scheduled event
The BLS publishes CPI on a predictable schedule. The next scheduled release in the research is January 2026 CPI data on February 11, 2026 at 8:30 a.m. ET. That matters because markets, businesses, and sometimes employers time decisions around those releases.
Practical takeaway: A disciplined reader watches (1) the trend, (2) the category drivers, and (3) which index is being used—CPI or PCE—before drawing conclusions.
Practical takeaway: A disciplined reader watches (1) the trend, (2) the category drivers, and (3) which index is being used—CPI or PCE—before drawing conclusions.
A disciplined way to read inflation releases
- ✓Track both year-over-year and month-over-month changes
- ✓Scan which categories drove the move (especially shelter, food, energy)
- ✓Confirm whether the headline is CPI or PCE (and whether it’s core)
- ✓Note the release schedule to avoid reacting to noise or narrative swings
So are we headed for deflation? Probably not—and be careful what you wish for
People often ask for deflation when they mean “I want my wages to catch up” or “I want necessities to stop rising.” Broad deflation—an across-the-board fall in prices—can arrive with weak demand, falling incomes, and financial stress. The better ambition is usually stable, low inflation alongside real wage growth and a functioning housing market.
None of that requires pretending inflation isn’t real. The BLS numbers show prices were still rising in late 2025: +2.7% year over year in CPI-U, with a +0.3% monthly increase in December and shelter rising 0.4% that month. BEA’s core PCE readings in the high-2% range suggest inflation pressures haven’t vanished—they’ve moderated.
The lasting frustration is psychological as much as statistical. Families anchor to what prices “should” be, and the economy rarely honors that memory. Policy aims to slow the ascent, not roll back time.
A useful mental model is to stop asking when prices will return to old levels, and start asking when incomes, housing supply conditions, and competitive pressure will make current prices feel manageable again. Inflation tells you how fast the elevator is moving. Your budget tells you what floor you’re stuck on.
None of that requires pretending inflation isn’t real. The BLS numbers show prices were still rising in late 2025: +2.7% year over year in CPI-U, with a +0.3% monthly increase in December and shelter rising 0.4% that month. BEA’s core PCE readings in the high-2% range suggest inflation pressures haven’t vanished—they’ve moderated.
The lasting frustration is psychological as much as statistical. Families anchor to what prices “should” be, and the economy rarely honors that memory. Policy aims to slow the ascent, not roll back time.
A useful mental model is to stop asking when prices will return to old levels, and start asking when incomes, housing supply conditions, and competitive pressure will make current prices feel manageable again. Inflation tells you how fast the elevator is moving. Your budget tells you what floor you’re stuck on.
“Inflation tells you how fast the elevator is moving. Your budget tells you what floor you’re stuck on.”
— — TheMurrow Editorial
T
About the Author
TheMurrow Editorial is a writer for TheMurrow covering explainers.
Frequently Asked Questions
Is inflation the same thing as “prices are high”?
No. Inflation is the rate at which the overall price level rises over time—typically reported as a 12-month percentage change in CPI or PCE. “Prices are high” describes the price level, which can remain elevated even after inflation slows. Disinflation (slower inflation) doesn’t usually bring prices back down.
If inflation drops, why don’t prices drop too?
Because lower inflation means prices are still rising—just more slowly. Broad price declines require deflation, which is sustained negative inflation. Deflation can happen in weak economies and can create its own problems, including postponed spending and heavier real debt burdens.
What’s the difference between CPI and PCE?
CPI (BLS) measures price changes for a basket purchased by urban consumers and is the most commonly cited number. PCE (BEA) uses broader data sources, reflects substitution behavior, and has different weights. The Federal Reserve frames its 2% inflation goal in terms of PCE inflation, so it often matters more for policy.
What did the latest CPI report show?
The December 2025 CPI-U report showed +0.3% month over month (seasonally adjusted) and +2.7% year over year (not seasonally adjusted). The BLS noted shelter as the largest contributor to the monthly increase, with shelter up 0.4% in December; food rose 0.7% and energy 0.3%.
Why does housing have such a big effect on inflation?
In CPI, shelter is a large share of the basket. The BLS lists shelter’s relative importance at 35.483% (Dec 2024), with Owners’ Equivalent Rent (26.282%) and rent of primary residence (7.499%) making up major components. When shelter rises, overall inflation often stays elevated even if other prices cool.
What is “core” inflation, and should I care?
Core inflation excludes food and energy to reduce volatility and highlight underlying trends. Policymakers and economists track it closely—BEA’s core PCE ran in the high-2% range in late 2025 (e.g., 2.8% year over year in November 2025). Core can help forecast policy, but it won’t perfectly match household pain points.
