David
Hello and welcome to 'Econ Explained,' the podcast that makes sense of the dollars and cents in your life. I’m your host, David.
Ema
And I'm Ema, it’s great to be here! Today is June 25th, 2025, and we're tackling a big one.
David
That's right. We're asking a question that’s on everyone’s mind: Why do prices go up, but never seem to come back down? We'll explore the hidden forces keeping your grocery bill high.
David
So, Ema, let's start with the basic feeling. We hear on the news that inflation has cooled off, maybe it's down to just one or two percent. But when I go to the store, the prices I see are still way higher than they were a few years ago. What gives?
Ema
That's the million-dollar question, David! And you're not imagining it. The key thing to understand is the difference between inflation slowing down and prices actually falling. They are two very, very different things.
David
Okay, so when they say inflation is at 2%, that doesn't mean prices are dropping by 2%?
Ema
Exactly. Think of it like a car. For the past couple of years, the car of prices was accelerating hard. Now, the driver has eased off the gas a bit. The car is still moving forward, just not speeding up as quickly. That's low inflation, or what economists call *disinflation*.
David
So the car is still moving away from my wallet's comfort zone. What most of us want, I think, is for the car to go in reverse. We want prices to go back to what they were. That would be… deflation?
Ema
You got it! That’s deflation, a sustained decrease in the general price level. And here’s the kicker: the people managing our economy, specifically the Federal Reserve, are absolutely terrified of that car going in reverse. It’s their number one fear.
David
Terrified? Of lower prices? That sounds completely backward to me. I would love it if my rent and my gas bill went down. Why on earth would that be a bad thing?
Ema
It seems counterintuitive, right? But from their perspective, widespread falling prices can trigger a catastrophic economic spiral. It's a fear that is baked into the very foundation of how our modern economy is managed.
David
Okay, you have my attention. Let's get into the background here. You mentioned the Federal Reserve, or 'the Fed'. I know they set interest rates, but it sounds like their role is much bigger than that.
Ema
It absolutely is. The Fed is the central bank of the United States, and it has what's called a 'dual mandate' from Congress: to promote maximum employment and to maintain stable prices. And 'stable prices' is the crucial part of our conversation today.
David
So how do they define 'stable prices'? Does it mean prices stay the same?
Ema
That's the surprising part—no. For the Fed, 'price stability' means a low, steady inflation rate of about 2% per year. They are explicitly targeting a slow, constant increase in prices. It’s not a secret; it’s their stated policy.
David
Wait, let me get this straight. Their goal is to make everything a little bit more expensive every single year? On purpose?
Ema
Um, yes, precisely. They see that 2% target as a crucial buffer. The thing they want to avoid at all costs is that deflation we talked about. They look at history, like the Great Depression in the 1930s or Japan’s 'lost decade' from the 90s, and they see deflation as the ultimate villain.
David
What happened there? What is this 'deflationary spiral' they're so afraid of?
Ema
Imagine if everyone knew that a new car or a new TV would be cheaper next month. What would you do? You’d wait, right? Now, imagine everyone in the country does that for everything. Spending grinds to a halt.
David
Right, sales would plummet. So businesses would have to cut prices even more to try and get people to buy.
Ema
Exactly. And if that doesn't work, they cut production and start laying off workers. Now you have rising unemployment, which means even fewer people are spending money. And so prices fall further, people wait more, and the cycle spirals downward. It’s incredibly difficult to escape.
David
That sounds pretty grim. But is all deflation the same? The source material we reviewed for this show made a distinction between 'good' and 'bad' deflation. What's that about?
Ema
An excellent point! This is where the debate gets really interesting. Let’s start with 'good deflation.' This is the healthy, normal kind of deflation that comes from progress and productivity. Think about technology.
David
Like my smartphone? The first one I had was a brick that could barely browse the internet, and it cost a fortune. Now they’re unbelievably powerful and relatively cheaper.
Ema
Exactly! Or flat-screen TVs, computers, you name it. When we get better at making things, the cost to produce them falls, and so do the prices for consumers. This type of deflation is a sign of a healthy, growing economy. It means our standard of living is rising.
David
Okay, that's definitely good. So what makes deflation 'bad'?
Ema
'Bad deflation' is different. It's not caused by producing more goods; it's caused by a collapse in the amount of money in the economy. This is often called 'debt deflation.' It happens after a major financial crisis when lots of people and businesses default on their loans.
David
So, less money is chasing the same amount of stuff, which makes the remaining money more valuable, and prices fall for that reason?
Ema
You've got it. And this is the kind of deflation that happened during the Great Depression. It’s devastating for anyone with debt, like a farmer or a small business owner. Suddenly, the real value of their loan doubles, and they get wiped out. It's the economic death spiral the Fed fears.
David
This brings us to the central conflict. The Fed says it's protecting us from this 'bad' deflationary spiral. But the critics we read, like that article from Money Metals Exchange, claim the Fed is actually the source of the problem.
Ema
That's the core of their argument. They say the Fed creates what’s called a 'boom-bust cycle.' First, the Fed makes money artificially cheap by keeping interest rates super low. This encourages a ton of borrowing and spending, creating a 'boom' or an economic bubble.
David
And I'm guessing that boom eventually leads to the high inflation we've all been feeling recently?
Ema
Precisely. Once that cheap money causes consumer prices to spike, the Fed has to slam on the brakes by jacking up interest rates to cool things down. And that sudden stop is what causes the 'bust'—widespread bankruptcies, defaults, and the 'bad deflation' they claimed to be preventing.
David
So the hilarious, or maybe tragic, irony is that their fear of 'good' deflation leads them to create the conditions for 'bad' deflation? Is that the argument?
Ema
That's the critique in a nutshell. These critics believe that by trying to smooth out the business cycle, the Fed actually makes the swings more violent. They argue that if the Fed just got out of the way, the economy would naturally experience 'good' deflation, making everyone better off over time.
David
So on one side, we have the Fed, saying, 'We're the firefighters preventing the whole town from burning down.' On the other, we have critics saying, 'You're the arsonists who keep starting the fires in the first place!'
Ema
It's a perfect analogy. The Fed's position is that they are a necessary stabilizing force in a complex world. They would point out that modern economies are prone to shocks, like a pandemic or a war, and monetary policy is a crucial tool to absorb those shocks.
David
And of course, public frustration fuels the critics' side. When people see prices skyrocket after years of low interest rates and government spending, it's very easy to believe that the central planners are to blame.
Ema
Right, because the connection feels so direct. People experience the pain of inflation in their daily lives, and it erodes trust in the institutions that are supposed to be managing the economy. It’s a very real and understandable frustration.
David
Let's dig into that a bit more. What is the real-world impact of this policy of always targeting a little bit of inflation and never letting prices fall?
Ema
The impact is huge, and it creates clear winners and losers. The biggest winners are debtors. If you have a large, long-term loan like a mortgage, inflation is your best friend. You're paying back the loan with money that is worth less and less over time.
David
That makes sense. The value of your debt effectively shrinks. But if there are winners, there must be losers. Who's on the other side of that transaction?
Ema
The losers are savers and anyone on a fixed income. Inflation is a silent tax on savings. If your money is sitting in a bank account earning 1% interest, but inflation is running at 3%, you are losing 2% of your purchasing power every single year.
David
Your money is essentially evaporating. That’s a sobering thought. It means you can't just save your way to a comfortable retirement; you're almost forced to become an investor and take on risk.
Ema
Exactly! It pushes people up the risk ladder, out of safe savings accounts and into stocks, bonds, and real estate, just to try and keep pace. This has profound effects on wealth inequality and can fuel the very asset bubbles the Fed is supposed to prevent.
David
And for retirees on a pension or a fixed income, it’s a constant struggle. Their income stays the same, but the cost of everything they need—food, healthcare, energy—keeps climbing year after year. It's a slow-motion squeeze.
David
So, looking to the future, are we just stuck with this forever? Is there any scenario where we see prices durably fall back to where they once were?
Ema
Honestly, David, it's extremely unlikely. Given the entire institutional framework of the Federal Reserve and other central banks, their primary directive is to prevent that deflationary spiral. They will always step in with stimulus or money printing before they let prices fall across the board.
David
So, no magical return to 2019 prices. I guess I can stop hoping for that.
Ema
(laughs) You can probably let that dream go. The best-case scenario we can hope for is a return to that slow, steady 2% inflation target. We might see prices for specific goods fall due to technology, but the overall cost of living will likely continue its slow upward march.
David
So what's the key takeaway for our listeners? If this is the world we live in, how should we adapt our thinking and our financial planning?
Ema
The biggest takeaway is the importance of financial literacy. You have to understand that inflation is a constant headwind. Your wages and your investments need to grow faster than inflation just for you to maintain your ground. It means being a savvy investor is no longer a choice; it's a necessity.
David
So to wrap it all up: that feeling that prices only ever go up isn't just a feeling, it’s a feature of our economic system, not a bug. It's a deliberate policy choice made by the Federal Reserve to prevent what they see as a much worse outcome.
Ema
Exactly. But it's a choice with very real consequences and trade-offs, creating a constant challenge for savers and anyone trying to build long-term wealth.
David
Ema, thank you for breaking that down so clearly. And thank you to our listeners for tuning in to 'Econ Explained.' Until next time, stay curious and mind your money.
