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Oh boy. Here we go. Time to be the bearer of bad news... again.

Earlier this week, I was chatting with Eve, the 22-year-old nanny who helps watch the boys, when she hit me with something I hear all the time.

"I can't wait for prices to start going down on everything. I'm so over how expensive everything is. It's really messing with my budget."

"Because inflation is cooling?" I asked.

"Right; you've been talking about it all year. Inflation was rising, so everything got more expensive. But now it's falling, so everything will finally go back to normal."

I paused. "Eve, I'm so sorry to be the one to tell you... but that's actually not what falling inflation means."

Let's dig into this a little bit more and get to the heart of this misunderstanding.

Why Prices Aren't Falling, Even Though Inflation Rates Are

Like Eve, you've probably heard that inflation is cooling down. And, honestly, that's a relief after the wild ride we've been on. Prices shot up so fast in the past couple of years that just about everything — from groceries to gas — became noticeably more expensive.

So, hearing that inflation is "cooling" sounds like good news, right? Maybe even a sign that prices are coming back down?

Like I told Eve... not exactly.

See, when economists say inflation is cooling, they don't mean that prices are dropping. What they actually mean is that prices are still going up — they're just not going up as fast as they were before.

So, if you were hoping to see grocery bills shrink, you might be disappointed. (More on that in a bit.) Prices are still higher than they were a few years ago, but instead of increasing by 9% like they did in 2022, now they're only going up by about 3%.

In other words, things are getting more expensive... just at a slower pace.

Let's dig into what this all really means — because words like "inflation," "deflation," and "disinflation" get tossed around a lot, but they can be tricky to understand unless you're following the economy every day. And really, who has time for that?

What Is Inflation?

Inflation is simply the rise in prices over time. If the cost of things like groceries, rent, and gas is going up year after year, that's inflation. And it's not just about one or two items — it's when the overall prices of goods and services across the board start creeping up.

Now, as much as we hate rising prices, inflation isn't actually a bad thing. In fact, the experts at the Federal Reserve actually aim for an inflation rate of about 2% per year. That's the sweet spot where prices rise enough to encourage economic growth but not so fast that it causes problems for consumers.

It's when inflation gets out of control, like it did in 2022 when inflation hit a high of 9.1%, that it becomes a problem. That's when you see headlines about the cost of living going up faster than wages, leaving people feeling squeezed.

Why does this happen? Well, there are a lot of factors. Sometimes, it's because there's too much demand for not enough goods (like all those supply chain issues we kept hearing about during the pandemic). Other times, it's because businesses have to raise prices on their goods and services to cover higher wages or expensive materials. And sometimes, it's just a natural part of the economy.

Cooling Inflation: What It Actually Means

That brings us back to cooling inflation. It sounds like it should be a good thing, right? And in some ways, it is! When we say inflation is cooling, we're saying that prices are still rising, but they're not skyrocketing like they were before.

So, instead of seeing your grocery bill jump by 12% like it did two years ago, maybe this year it's only going up by 2%. That's still an increase, but not quite as severe. Theoretically, there's more of a chance for things to normalize as wages continue to grow. (Average year-over-year wage growth was about 4.5% in August, although faster wage growth for the top 1% of earners usually distorts that number for the other 99%.)

That said, cooling inflation doesn't mean prices are falling. If you're waiting for gas or groceries to go back to what they cost before the pandemic, you might be waiting a while.

For the most part, those higher prices are here to stay. What's happening now is that we're adjusting to a new normal. Prices have settled at a higher level, and the goal now is to keep them from rising too quickly going forward.

What About Deflation?

Now, let's talk about the other side of the coin — deflation. This is when prices actually go down. At first glance, that seems pretty awesome, right? Who wouldn't want to see things get cheaper? I'd like it. Eve would certainly like it.

But, as it turns out, deflation can actually be a bad thing for the economy.

When prices start falling across the board, people tend to hold off on making purchases. Think about it — if you knew that a new car or TV would be cheaper next year, wouldn't you wait to buy it? That kind of thinking can lead to less spending overall, which can cause businesses to slow down, cut jobs, or reduce wages. And suddenly, the economy starts to shrink instead of grow.

Japan has dealt with deflation since the 1990s, and it hasn't been great for their economy. In the United States, we saw a brief period of deflation during the early months of the pandemic, when prices plunged because everyone was stuck at home and not spending much money. Gas prices dropped, but that was mostly because no one was driving anywhere. Deflation, in the long run, can be a sign of economic distress — something we definitely want to avoid.

So, Prices Aren't Going to Fall?

Actually, some prices are falling. But before you start celebrating, it's important to understand why.

Take eggs, for example. If you remember, their prices shot up throughout 2022 due to an avian flu outbreak that wiped out a large chunk of the nation's egg-laying chickens. Fewer chickens meant fewer eggs, and that shortage drove prices through the roof.

Now that the flocks have recovered, egg prices have come down by more than 20%, bringing some relief to your grocery bill. Gas prices have also dropped by more than 26%, thanks to a combination of factors, including lower demand and stabilized global supply chains.

Even so, we're still not seeing across-the-board price drops. In fact, while some individual items have seen price cuts, the overall trend still shows prices rising — just more slowly.

Think of it like a seesaw: While one side might dip down, the other side is still climbing. Because inflation is still positive, we know that for every price drop, there's another item getting more expensive. For instance, while eggs and gas may have gotten cheaper, things like healthcare, rent, and certain utilities are still inching upward.

So, yes, you might notice that certain items in your budget are a little cheaper than they were last year, but don't expect a huge, across-the-board drop in prices. These small victories are often tied to specific events, like supply chain issues or short-term economic shocks, rather than a broader trend of falling prices.

We're Not Out of the Woods Yet, But We're Getting There

At the end of the day, the reason we care about cooling inflation is that it gives us some breathing room. Prices are still going up, but they're doing so at a pace that's less painful for our wallets. The Federal Reserve's goal is to get inflation down to about 2%, where prices rise just enough to keep the economy healthy, but not so much that we're all constantly worried about how much things cost.

Sure, we'd all love to see prices drop, but in reality, the best-case scenario is probably slowing down the increases and letting wages catch up. After all, if wages start rising faster than prices (which we've started to see in some cases), people can begin to regain some buying power, and that helps the overall economy.

So, no, cooling inflation doesn't mean things are getting cheaper — just that they're not getting more expensive as quickly. It's progress, but it's not an immediate solution. The good news? We're seeing wages rise, inflation cool down, and hopefully, we'll find ourselves in a much more balanced place soon.

In the meantime, stay informed, keep an eye on your finances, and know that while prices might not go back to what they were before the pandemic, we're moving in the right direction.