What Inflation Really Is and Why It Hits Some People Harder Than Others

When headlines celebrate inflation "cooling" to 2.7%, you might wonder why your grocery bill still feels crushing. The answer reveals something fundamental about how inflation works and why it doesn't affect everyone equally.

What Inflation Actually Means

Inflation measures how fast prices are rising, not whether they're falling. When the Consumer Price Index increased 2.7% in December 2025 compared to December 2024, that means prices are still going up just more slowly than before.

Think of it like a car: inflation is your speedometer, not your odometer. Slowing from 60 mph to 30 mph means you're decelerating, but you're still moving forward. You haven't reversed direction. Similarly, cooling inflation means prices rise more slowly, but they're still rising. 

That gallon of milk that cost $3.00 two years ago might cost $3.86 today. Even if inflation "cools," next year it'll be $3.93, not back to $3.00.

Since 2020, consumer prices have risen about 21% cumulatively. Your dollar today buys roughly what 80 cents bought four years ago. This permanent shift explains why people feel financially squeezed even when economists celebrate progress.

The Federal Reserve targets 2% annual inflation considered healthy for a growing economy. It allows wages and prices to adjust naturally while keeping purchasing power relatively stable. When inflation runs significantly above that target, as it did reaching 9.1% in mid-2022, it erodes savings and makes planning nearly impossible.

Why the Same Inflation Rate Hits People Differently

Here's where inflation becomes deeply unequal: it doesn't affect all households the same way, even when the official rate is identical for everyone.

Research from the Federal Reserve Bank of Minneapolis reveals that inflation rates from one family to another can be vastly different, even if they share the same demographics. The national average obscures these variations.

The key factor is what you spend money on. Lower-income households devote proportionately more of their budgets to necessities food, housing, utilities, transportation. Wealthier households spend more on discretionary items and services. When necessities inflate faster than luxuries, lower-income families suffer disproportionately.

Food prices jumped 3.1% in the twelve months ending December 2025 faster than overall inflation. That matters enormously because food costs represent about 40% of spending in low-income households but only 17% for higher earners in advanced economies. The same percentage increase hits completely differently depending on your budget structure.

Beef and veal prices spiked over 16% year-over-year driven by the smallest U.S. cattle herd in decades. Coffee rose about 19% due to weather disruptions. Food away from home increased 4.1%. These aren't luxuries you can easily cut, they're the groceries and occasional meals that constitute basic living.

The Flexibility Gap

Lower-income families face a second disadvantage: less flexibility to adjust. Minneapolis Fed research shows they're more likely already buying low-cost brands and have limited ability to substitute or trade down further when prices rise. A wealthy family might switch from organic to conventional produce. A family already buying the cheapest option has nowhere left to go.

Utility costs amplified this squeeze. Electricity prices rose nearly 7% over the past year and close to 30% over four years. Natural gas posted double-digit gains. Americans now pay an average of $265 monthly in utility costs, up 12% since last year. You can't simply "cut back" on heating your home in winter or cooling it in summer.

Housing represents the starkest divide. Shelter costs increased 3.2% annually, accounting for more than one-third of CPI weighting. But the impact varies wildly. Homeowners with fixed-rate mortgages are largely insulated. Renters face the full force, with rents jumping nearly 28% over five years.

The Bottom Line

Inflation isn't just a number it's a mechanism that reshapes who can afford what. When economists say inflation is "under control" at 2.7%, they mean it's moving back toward normal. But normal doesn't undo the damage already done.

For families spending heavily on necessities that inflated fastest, the pain persists regardless of what national averages suggest. Your experience of inflation depends less on the headline rate and more on what you're forced to buy, how much flexibility you have to adjust, and whether your wages kept pace.

This is why some people genuinely struggle while statistics suggest improvement. They're both true just measuring different realities.