Why Inflation Feels So Stubborn

Inflation is the steady rise in the general level of prices over time, but not all prices move smoothly or quickly. Prices often stick, resisting change even when economic conditions shift, and that stickiness shapes how inflation behaves and how it feels in everyday life.​

What inflation actually is

Inflation is not just a few items getting more expensive; it is a broad increase in prices across many goods and services over time. Economists typically track it using indexes like the Consumer Price Index (CPI) or the Personal Consumption Expenditures (PCE) index, which look at the average price of a basket of common purchases such as food, housing, transportation, and healthcare. When those averages rise persistently, the purchasing power of money falls, meaning each dollar buys less than before.​

The idea of “sticky” prices

In a perfectly flexible world, prices would adjust instantly whenever demand or supply changed, but real-world prices tend to stay fixed for stretches of time. This tendency is called price stickiness or sticky prices and it can be seen in how wages, menu prices, and many service fees change infrequently. Price stickiness helps explain why the economy does not instantly snap back after shocks and why inflation can be slow to appear, slow to fall, or persist longer than expected.​

There are two main dimensions of stickiness that matter:

• How often prices change at all (frequency of adjustment).
• How large those changes are when they do happen (size of adjustment).​

Many businesses leave prices unchanged for months, then implement a noticeable jump rather than making tiny, constant tweaks, and that pattern is central to understanding how inflation behaves in practice.​

Why businesses don’t change prices constantly

Businesses face several practical and strategic reasons not to adjust prices every time costs or demand move a little.​

1. Menu costs
   Even small, literal or figurative “menu” costs can discourage frequent price changes. Restaurants must print new menus; retailers must re-tag items; online sellers must adjust listings and promotional material, all of which take time and money. If costs move up and down frequently, many firms prefer to wait until the change is big enough to justify the effort of updating.​
2. Customer relationships and expectations
   Companies worry about how customers react to frequent or unpredictable price changes. Stable prices create a sense of reliability and fairness, while rapid, repeated changes may seem opportunistic or confusing. Many businesses choose to hold prices steady for a period and absorb small cost changes in their margins, then make occasional, more predictable adjustments—often annually or seasonally.​
3. Psychological price points
   Consumers are highly sensitive to thresholds: 9.99 versus 10.00, 99 versus 100, and so on. Because crossing these psychological boundaries can feel like a bigger change than it actually is, firms often keep prices at “attractive” levels as long as possible. Instead of nudging a price from 9.99 to 10.05, a business may stay at 9.99 until cost pressures are large enough that 10.49 or 10.99 becomes necessary, skipping small increments.​
4. Contracts and formal agreements
   Many prices are set in contracts that last months or years, such as leases, supply agreements, and some service contracts. These contracts lock in prices temporarily, making them sticky even when overall economic conditions change. When the contract expires, prices can reset sharply, which is one reason some components of inflation (like rents) move slowly at first but then catch up with a lag.​
5. Wage stickiness
   Wages are among the stickiest prices in the economy. Employers rarely cut nominal wages because pay cuts deeply affect morale and can lead to turnover and reputational damage, so companies tend to freeze wages during tough times rather than reduce them and raise wages infrequently in regular review cycles. Because labor is a large share of costs in many industries, wage stickiness feeds into overall price behavior over time.​

How sticky prices shape inflation

Because many prices adjust slowly, inflation does not respond instantly to changes in demand, supply shocks, or interest rate moves. Several important patterns follow from this.​

1. Delayed response to shocks
   When there is a sudden jump in demand, businesses with sticky prices may initially see higher sales rather than higher prices. Over time, as demand remains strong and costs rise, firms begin to raise prices in batches—say when they reprint menus, renegotiate contracts, or reset annual price lists—creating a lag between the shock and the visible rise in inflation.​
2. Inflation that is “persistent”
   Once inflation has picked up, price stickiness can make it harder for inflation to fall quickly. Many prices—especially in services and rents—adjust only periodically and often in one direction: up, and if firms expect their costs to keep rising, they may build those expectations into the next round of adjustments, keeping inflation elevated even after the worst of the shock has passed.​
3. Differences across sectors: flexible vs. sticky
   Some categories have relatively flexible prices, such as gasoline, some food items, and traded commodities that respond quickly to market conditions. Other areas—especially services like healthcare, education, rents, and professional services—are much stickier and adjust less frequently. Economists sometimes separate “flexible-price” inflation from “sticky-price” inflation to understand the underlying trend in price pressures.​

Expectations and the “sticking” of inflation

Expectations play a major role in whether inflation stays high or returns to lower levels. If households and businesses believe that higher inflation will persist, their behavior can reinforce that belief.​

• Workers may demand larger, regular wage increases to keep up with expected price rises.
• Businesses may routinely build higher cost expectations into annual price reviews.
• Landlords and lenders may assume higher inflation when setting rents or interest rates for future years.​

Because many price and wage decisions are made infrequently, expectations about future inflation can influence the next adjustment in a step-like way, and when the adjustment finally occurs, it can “bake in” those expectations for months or years. If central banks maintain credibility that inflation will return to target, that can help prevent expectations from drifting too high and reduce the size of future price and wage adjustments.​

Why some prices feel especially sticky going down

People often notice that prices rise easily but rarely fall as quickly, even when conditions improve, and several forces contribute to this downward stickiness.​

1. Avoiding anger and confusion
   Consumers tend to react much more negatively to price increases than positively to equivalent decreases. Businesses know that any visible cut can set a new reference point, making later increases more painful for customers to accept, so they may prefer temporary discounts or promotions rather than permanent list-price cuts.​
2. Margin rebuilding
   After periods of high input costs, firms may have squeezed margins or delayed some price hikes. When costs begin to fall, businesses might choose to restore healthier profit margins rather than pass all the savings through immediately, which slows price declines.​
3. Information and attention
   Consumers do not track every price closely and may not expect immediate reductions when conditions ease. Businesses often react faster to cost increases, which threaten profits, than to cost decreases, especially if customers are not actively demanding lower prices.​

Central banks and sticky prices

Central banks, like the Federal Reserve, aim to keep inflation low and stable, often around a target such as 2 percent per year. Price stickiness is central to how they design and time policy changes.​

1. Why interest rate changes work with a lag
   Raising interest rates typically cools demand by making borrowing more expensive and saving more attractive. However, because many prices and wages are fixed for a time, it can take quarters or even years for lower demand to translate into a slower pace of price increases, so authorities must act with an eye to where inflation will be once current decisions feed through the system.​
2. Focusing on underlying measures
   To see past short-term volatility, policymakers often look at core inflation (which excludes food and energy) and measures of sticky-price inflation that focus on categories with infrequent adjustments. If sticky categories such as rents and services are rising quickly, it suggests more persistent inflation that may require stronger or more prolonged policy action.​

What sticky prices mean for households

For individuals and families, sticky prices shape how inflation is experienced and how to respond in practice.​

• Budgets feel the most pressure where prices change infrequently but in large jumps, such as rent renewals, tuition bills, or insurance premiums, so planning for those step changes can reduce shocks.
• Wage stickiness means that pay might not immediately keep pace with a burst of inflation, compressing real purchasing power in the short term and making awareness of raise cycles and cost-of-living adjustments important.
• Some categories—like gasoline or fresh groceries—may fluctuate rapidly, but over time the steadier, stickier components often dominate long-run inflation.​

Understanding that prices are sticky clarifies why inflation can seem slow to appear, frustratingly slow to disappear, and uneven across the things people buy. It also shows why small, regular inflation can be manageable, while sudden, large bursts create stress: by the time many sticky prices finally adjust, the entire cost structure of everyday life may have reset to a new, higher level.​