The Price of Milk Dropped. So Why Does Everyone Still Think Everything Costs Too Much?
In the fall of 2023, a strange thing happened in the aisles of American grocery stores. The price of a gallon of milk, after two years of relentless climbing, actually fell. So did the price of eggs. So did the price of used cars. By most objective measures, inflation was cooling off. The Federal Reserve’s preferred index showed prices rising at an annual rate of just over 2 percent, right around the central bank’s target. The crisis, by the numbers, was over.
But ask anyone on the street how they felt about the economy, and you got a very different story. Consumer sentiment surveys hit lows not seen since the depths of the 2008 financial crisis. People told pollsters they thought prices were still climbing, and climbing fast. They told researchers they believed inflation was running at 8 or 9 percent, not the 3 percent the data showed. They were wrong. And they were stubbornly, consistently wrong, even as the actual rate of price increases slowed to a crawl.
This is not a story about people being dumb. It is a story about how our brains learn to expect the future, and why that learning doesn’t unlearn easily. For the past several years, a small but growing body of research has been documenting a puzzling phenomenon: inflation expectations, once they rise, can stay elevated long after the actual inflation rate returns to normal. And that lag matters. It shapes wage negotiations, spending decisions, and the very economic psychology that can turn a contained price shock into a self-fulfilling spiral.
The Brain Treats a Price Drop as a Gift, Not a Signal
One of the most influential papers on this topic was published in 2023 by economists at the Federal Reserve Bank of New York and the University of Michigan. The researchers, led by Olivier Coibion, ran a field experiment with a large sample of U.S. households. They gave one group of participants real-time information about the actual inflation rate, updated monthly. Another group got nothing. The idea was simple: if people were misinformed, giving them correct information should correct their expectations.
It didn’t work. At least not much. The informed group’s expectations did shift, but only by a small amount. Most people who were told that inflation had fallen from 9 percent to 3 percent still believed it was running at 6 or 7 percent. They didn’t trust the data. Or they didn’t believe it applied to them.
This finding has been replicated in multiple contexts. A 2022 study by researchers at the London School of Economics and the Bank of England found a similar pattern in the U.K. after the post-pandemic price surge. Even when researchers showed participants official inflation statistics, many continued to report expectations that were two or three times higher than reality. The researchers called this “sticky expectations.” The more accurate term might be “stubborn expectations.”
Why does this happen? One clue comes from a well-known cognitive bias called the availability heuristic. When you ask someone how fast prices are rising, they don’t mentally compute a weighted average of all price changes across the economy. They think of the last thing they bought that felt expensive. If they bought a carton of eggs last week and it cost 50 percent more than it did two years ago, that’s the data point their brain uses. The fact that overall inflation has slowed doesn’t erase that memory. It just becomes another data point in a mental model that is heavily weighted toward vivid, recent, personal experiences.
Why Your Brain Ignores the Headline Number and Trusts Your Wallet
There is a deeper psychological mechanism at work here, and it has to do with how we perceive sequences of changes versus levels of prices. Economists typically talk about inflation as a rate: prices are rising at 2 percent per year. But most people experience inflation as a level: milk costs $4.50 now, and it used to cost $3.00. The rate of change is an abstraction. The level is a concrete fact.
This distinction matters because of a phenomenon called “level anchoring.” In a 2021 paper, researchers at the University of Chicago and the Federal Reserve Board found that once people form a mental anchor around a high price level, they don’t easily let go of it, even when the rate of increase slows. If you got used to paying $5 for a gallon of milk, the fact that milk prices are now rising at only 2 percent per year instead of 10 percent per year doesn’t feel like good news. It feels like you’re still paying $5 for milk. The price hasn’t gone back down. It just stopped going up as fast.
This is a subtle but powerful distinction. When inflation falls from 9 percent to 3 percent, economists call that disinflation. It is good news. But to a consumer, it feels like the high prices are still there, just growing a little more slowly. The relief never arrives. The sticker shock doesn’t fade. And so the expectation that prices will keep rising stays lodged in the mind, even as the data says otherwise.
Researchers call this “inflation scar.” It is a kind of economic PTSD. Once you have been burned by a period of high inflation, your brain recalibrates its baseline. You become hypervigilant. You start noticing every price increase and ignoring every price decrease. You develop a systematic bias in how you process economic information.
The Self-Fulfilling Prophecy of Pessimism
Here is where the research gets truly unsettling. Stubbornly high inflation expectations are not just a cognitive curiosity. They can become an economic force in their own right.
A landmark paper by economists at the Federal Reserve Bank of San Francisco, published in 2022, showed that when households expect high inflation, they change their behavior in ways that can actually produce higher inflation. Workers demand higher wages to compensate for expected price increases. Firms, anticipating higher costs, raise prices preemptively. Consumers rush to buy goods now before they get more expensive, which drives up demand and pushes prices higher.
This is the inflation expectations channel. It is the reason central bankers obsess over surveys of consumer sentiment and market-based inflation forecasts. If expectations become unanchored, the whole system can tip into a self-fulfilling spiral. The Fed’s entire strategy for fighting inflation, in fact, relies on managing expectations. When Jerome Powell says the Fed is “committed to bringing inflation down,” he is not just talking about interest rates. He is trying to shape what people believe will happen next.
But the research suggests this channel works better in theory than in practice, at least in the short term. The same 2023 Coibion study found that even when the Fed successfully lowered actual inflation, it had a much harder time lowering expected inflation. People’s beliefs were sticky. They did not update quickly in response to new data. They updated slowly, grudgingly, and incompletely.
The Role of Trust in Institutions
One factor that amplifies this stickiness is trust. A 2020 paper by researchers at the University of Michigan and the Federal Reserve Board found that people who distrust the Fed, the government, or the media are significantly less likely to update their inflation expectations in response to official data. They view the numbers as propaganda. They rely instead on their own personal experience, which is often more negative.
This creates a troubling feedback loop. The people who most need to update their expectations are the ones least likely to do so. And because they are also the people most likely to demand higher wages and change their spending habits, their stubborn expectations have an outsized impact on the actual economy.
What the Data Actually Shows About Who Gets It Wrong
The research also reveals a striking pattern in who holds the most inaccurate inflation expectations. It is not random.
A 2021 study by economists at the University of Oxford and the Bank for International Settlements analyzed survey data from 15 countries over 30 years. They found that older people, less educated people, and people with lower incomes consistently overestimate inflation. They also found that women tend to have higher inflation expectations than men, a gap that persists even after controlling for income and education.
Why? One theory is that these groups do more of the household shopping. They are the ones who see the price of eggs and milk and bread every week. Their mental inflation index is heavily weighted toward food and energy, which are volatile and often rise faster than the overall index. The official CPI, by contrast, includes things like rent, medical care, and electronics, which are less visible to the average shopper. So the gap between perceived inflation and actual inflation is not just a bias. It is a reflection of a real difference in consumption baskets.
This insight comes from a clever 2019 paper by researchers at the University of Chicago and the Federal Reserve Bank of New York. They asked households to keep a diary of every purchase they made for two weeks. Then they calculated each household’s personal inflation rate based on what they actually bought. The results were striking. Low-income households, who spend a larger share of their budget on food and gas, experienced a personal inflation rate that was often 2 to 3 percentage points higher than the official rate. Their inflation expectations, in other words, were not wrong. They were accurate for their own lives.
The Limits of This Research
This body of work has real limitations, and the researchers are honest about them. Most of the studies rely on survey data, which is noisy. People say things in surveys that do not always match their behavior. A person might report that they expect 8 percent inflation, but then go out and buy a house based on a 3 percent mortgage rate. The survey response is a cheap talk signal. It is not a binding commitment.
Another limitation is that these studies are mostly conducted in high-income countries with stable monetary policy frameworks. It is not clear how well the findings generalize to places like Argentina or Turkey, where inflation has been chronically high for decades. In those contexts, expectations might be even more stubborn, or they might behave differently entirely.
Finally, the research is still young. The post-pandemic inflation episode was a unique event, the first major inflation shock in the developed world since the 1970s. We do not yet know how long these sticky expectations will persist. It is possible that they will fade on their own as the memory of high prices recedes. It is also possible that they will become a permanent feature of the economic landscape, a kind of scar tissue that never fully heals.
What This Actually Means
- ▸If you are a policymaker, do not expect a single press release or interest rate cut to reset public expectations. You need months of consistent, visible price stability to rebuild trust. The data alone won’t do it. People need to see it in their own shopping carts.
- ▸If you are a business owner setting prices or wages, assume your customers and employees are operating on a different inflation reality than the official numbers. Their expectations are based on what they paid last year, not what the CPI says. Price your goods and set your compensation accordingly.
- ▸If you are a journalist or communicator, stop just reporting the headline inflation rate. Explain the gap between the official number and what people actually experience. Show people why milk costs what it costs. The more you make the invisible visible, the more you help people update their mental models.
- ▸If you are an individual trying to make sense of your own financial life, recognize that your brain is wired to overweigh recent, vivid price increases. Your perception of inflation is not a lie. It is a bias. And biases can be corrected by paying attention to the things that do not change. The rent that stays the same. The streaming subscription that holds its price. The car loan with a fixed rate. The full picture is always more stable than the part you remember.