Prices versus inflation

Director and Executive Editor, Indiana Business Research Center, Indiana University Kelley School of Business

What households notice are not changes in the inflation rate, but the prices of goods and services that have climbed substantially over the past several years.

Cognitive dissonance.

That is what we experience when we hear economists say inflation is down while we’re sitting at home thinking about our sky-high grocery bills or paying double what we used to for a tank of gas or a hotel room.

News reports frequently discuss inflation and whether it is going up or down. When inflation falls, it is easy to assume that prices will fall, too. In reality, inflation measures the rate at which prices increase, so lower inflation simply means prices are rising more slowly.

Prices = the level of cost (e.g., rent today is $1,200 vs. $900 last month)

Inflation = the rate of change in those prices over time (e.g., rent rising 5% per year)

What economists, the news media and policymakers often talk about is the Federal Reserve Bank’s ability to raise or lower prime interest rates, which, in turn, can influence borrowing, spending and investment. Prices don’t get lower, or at least not as quickly as prices can rise. What households notice are not changes in the inflation rate, but the prices of goods and services that have climbed substantially over the past several years (see Figure 1). Things like housing, healthcare, food and gasoline. Economists may celebrate slower inflation, but consumers are still paying much higher prices than before. Ergo, cognitive dissonance.

Table 1 outlines that dissonance.

Table 1: Economic vs. household price focus

Figure 1: Midwest Consumer Price Index shows rising price levels over time

Note: The Midwest CPI covers the East North Central and West North Central census divisions. It is commonly used as a proxy for Indiana since the BLS does not publish a standalone Indiana CPI.
Source: U.S. Bureau of Labor Statistics, Consumer Price Index

Figure 2: Inflation vs. wage growth trends

Note: Wage growth is calculated using the average hourly earnings of all private employees in Indiana. Inflation is calculated using Midwest CPI.
Source: U.S. Bureau of Labor Statistics, Consumer Price Index and Current Employment Statistics

Economists focus on inflation because it’s what policy can control and it serves as a signal of economic stability or volatility. But in our everyday lives, as consumers, we experience price levels and wage growth. And it’s our strained household budgets that capture the gap between economic measurement and our lived reality.

So the next time a headline announces that inflation is cooling, it's worth remembering what that claim does and doesn't mean. A lower inflation rate is good news for economic stability, but it is not a promise that the grocery bill or the rent check will shrink. Prices that have risen are, for the most part, here to stay; what changes is only how fast they keep rising.

For household budgets, relief depends less on inflation numbers and more on whether wages can close the gap that Figure 2 illustrates. Until paychecks catch up to the price level shown in Figure 1, the cognitive dissonance between what economists celebrate and what households feel at the checkout counter is likely to persist.

Want more to explore on this topic? Here are a couple suggestions:

Ranked: The prices surging fastest in 2026

Consumer Price Index (CPI) 12-month visual