Prices Rarely Fall the Way You Expect
Wise up in 60 seconds
- Prices rise faster than they fall
- Businesses respond urgently to higher costs but cautiously to lower ones
- Expectations reset upward and resist reversal
- Temporary discounts replace permanent price cuts
- Inflation feels persistent because price declines are slow and uneven
Gas spikes draw instant attention. Rent increases feel unavoidable. Grocery bills creep upward and never quite come back down.
This pattern is not just perception. It is built into how prices work.
Prices are far more flexible going up than they are going down.
The Asymmetry of Price Changes
In theory, prices should rise and fall smoothly as supply and demand shift.
In practice, they do not.
Businesses respond quickly to cost increases because higher costs threaten profits. When costs fall, the urgency disappears. Passing savings on to customers becomes optional.
This creates a built in asymmetry. Prices react fast to pressure from below and slowly to relief from above.
The Role of Expectations
Once a higher price becomes familiar, it resets expectations.
Consumers adapt. Budgets adjust. Complaints fade.
Lowering prices risks setting a new reference point that makes future increases harder to justify. Many businesses prefer stability over generosity, even when costs ease.
Temporary discounts feel safer than permanent cuts.
Psychological and Strategic Barriers
Price reductions send signals, and not all of them are positive.
Lower prices can imply lower quality. They can confuse customers. They can trigger suspicion about what changed.
Businesses also remember periods when margins were squeezed. When costs decline, rebuilding financial buffers often takes priority over immediate price relief.
From the firm’s perspective, this is rational. From the consumer’s perspective, it feels unfair.
Why Inflation Feels Like a Ratchet
Upward price movements tend to stick. Downward movements often get absorbed invisibly.
This creates a ratchet effect. Prices move up in steps and rarely return to previous levels, even when conditions improve.
Over time, this reshapes the cost structure of everyday life.
The result is inflation that feels persistent, even when official measures suggest it is slowing.
What This Means for Understanding Inflation
Inflation is not just about rising prices. It is about which prices change, how often they change, and in which direction.
Understanding why prices rarely fall helps explain why inflation feels different from how it is described in reports and headlines.
It also explains why public frustration often lingers long after economic conditions stabilize.
References
- Blinder, Alan S. “Why Are Prices Sticky? Preliminary Results from an Interview Study.” American Economic Review.
https://www.aeaweb.org/articles?id=10.1257/aer.81.2.89 - Mankiw, N. Gregory. “Small Menu Costs and Large Business Cycles.” Quarterly Journal of Economics.
https://scholar.harvard.edu/files/mankiw/files/menu_costs.pdf - Nakamura, Emi and Steinsson, Jón. “Price Setting in Forward Looking Customer Markets.” Journal of Monetary Economics.
https://www.nber.org/papers/w19180 - Federal Reserve Bank of Atlanta. “Sticky-Price CPI.”
https://www.atlantafed.org/research/inflationproject/stickyprice - Shiller, Robert J. Irrational Exuberance. Princeton University Press.
https://press.princeton.edu/books/paperback/9780691173122/irrational-exuberance - Thaler, Richard H. Misbehaving: The Making of Behavioral Economics. W. W. Norton.
https://en.wikipedia.org/wiki/Misbehaving:_The_Making_of_Behavioral_Economics
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