Think Businesses Will Lower Their Prices Once Inflation Drops? Think Again

It's not a given that all prices will come down.

It's been a struggle for many people to cover their living costs ever since inflation started surging in 2021. And over the past year and a half, many consumers have had to go the extreme of raiding their savings accounts or racking up credit card debt just to keep up with their basic expenses.

In January, living costs on a whole were up 6.4% on an annual basis, as per that month's Consumer Price Index. But in June 2022, inflation was up 9.1% on an annual basis, so January's reading is actually a big improvement.

Hopefully, in the coming months, the general cost of living will start to come down. And that's a scenario you may be eagerly awaiting. But one thing you shouldn't assume is that the businesses you frequent will automatically drop their prices once inflation starts to cool. Here's why.

It's a matter of habit

Rampant inflation has been with us for many months. And a lot of businesses both large and small raised their prices quite some time ago to compensate for the higher cost of procuring goods and/or paying for labor.

Now, you might assume that your local coffee house, which raised the price of a large iced coffee from $3 in 2021 to $4 in 2022, might lower that price once inflation cools off. But chances are, it won't.

The reason? If you've been paying $4 for that large iced coffee for the past nine months, then chances are, you'll continue doing so. So will all of the other loyal customers who have been frequenting that coffee shop. So why should the owner of that business feel motivated to drop their price when they can get away with charging more?

And it's not just small businesses that might make the decision to keep higher prices around. Larger ones might do so as well. So all told, lower inflation readings may not be something to get too excited about, because chances are, a number of your expenses will remain elevated for the long haul.

How to keep up with higher prices

If you're having a hard time paying your bills now based on what your expenses look like, the bad news is that things may not change all that much even once inflation cools. So a good bet is to be more mindful of your spending to really stretch your paycheck.

Put yourself on a budget where you allocate specific dollar amounts to different bills and spending categories. And be careful when spending money on non-essential purchases.

Going back to our example, if you can afford a $4 ice coffee three times a week, and it makes you happy, buy it. But only do so if you're managing your expenses and aren't running up credit card debt every month.

To be clear, some living costs, like groceries and utilities, might creep down to more moderate levels once inflation softens overall. But don't expect every expense of yours to shrink -- and prepare for some businesses to stick with the higher prices they've been charging simply because they can.