Why Is Inflation in the US Still High in 2025?

We’ve all felt it: grocery prices that keep creeping up, housing costs that just won’t budge, and energy bills that seem to surprise us every month. Even as we move toward the end of 2025, the annual inflation rate continues to shape the US economy and the financial decisions we make about spending money.

But what’s really raising interest rates? And why, after so many moves from government agencies, hasn’t it fully cooled? Let’s break it down together. We'll examine what’s happening now while taking in lessons from the past. Put those together, and we can position ourselves as smart investors, even when prices rise.

What is Inflation?

Let’s start with the basics. Inflation refers to the decline in a currency’s purchasing power, which means you need more dollars to buy the same goods and services. The Consumer Price Index (CPI), tracked by the Bureau of Labor Statistics, is the most common way to measure how prices change over time.

There are actually three main types of inflation, each triggered in its own way:

• Demand-pull inflation:

  Think of it as too many dollars chasing too few goods. For example, when consumer demand jumps (like with those stimulus checks back in 2020–2021), it can lead to higher prices.

• Cost-push inflation:

  This happens when the cost of things like labor or raw materials goes up. Companies then pass those costs on to us as consumers. Remember when energy prices and food prices suddenly surged? That’s cost-push in action.

• Built-in inflation:

  Here, it’s all about expectations. If workers and businesses believe prices will keep climbing, wages and prices rise together.

All these terms can sound like economist-speak. But at the end of the day, it’s about how much your money can buy. Lately, as inflation rises, every dollar you make has been buying less.

What Causes Inflation?

At its core, inflation boils down to two things: an increase in the money supply and a decrease in purchasing power. When the government increases government spending or the Federal Reserve takes action to stimulate economic activity, it can lead to price increases across the board.

Let’s look back for a second. During the COVID-19 pandemic, the US government rolled out massive stimulus packages to keep the economy afloat. While this was necessary, it also led to a surge in the money supply and, ultimately, higher inflation.

Core Inflation Rate

Core inflation reflects the long-term, underlying trend in price changes. It is shaped by economic forces that influence persistent inflationary pressure over time:

• Wage growth

• Monetary policy decisions

• Overall demand in the economy

Energy Prices, Goods, and Services

Prices of goods and services such as energy tend to be more volatile. For example, clothing and apparel prices would be affected by a mix of supply-side and demand-side factors.

On the supply side, production costs, input availability, and global supply chain conditions influence how expensive goods become. On the demand side, consumer spending patterns, income levels, and purchasing confidence shape how strongly people compete for available products and services. Together, these factors directly impact how prices move across the broader economy.

Inflation Rate 2025: Current Trends

So, where are we now? As of the first half of 2025, the current inflation rate has come down from those scary 9% peaks we saw in 2022. Even now, it hovers around 3%, which is still above the Federal Reserve’s 2% target for price stability.

Let’s break down what’s driving today’s numbers:

• Housing costs: Mortgage rates, while slightly lower than last year, remain elevated. Tight housing inventory means higher prices for both renters and buyers.

• Services inflation: Medical care, childcare, insurance, and other services keep getting pricier. Labor costs and wage growth play a big role here.

• Energy volatility: Geopolitical tensions have rattled global oil and gas markets, making energy prices unpredictable.

• Grocery prices: Food prices continue to rise, putting pressure on household budgets.

Major Events That Shaped The Current Inflation Rate

A little history helps explain where we are now:

• COVID-19 pandemic (2020–2021): Global supply chain issues, reduced production, and unprecedented government spending set the stage for high inflation.

• Federal Reserve’s response (2022–2024): The central bank raised nominal interest rates to levels we hadn’t seen in decades. This cooled demand but didn’t eliminate inflation.

• Inflation Reduction Act (2022): This was the government’s largest investment in climate and energy, aiming to lower long-term costs. Its near-term impact on consumer prices, though, has been modest.

We’ve also seen labor shortages and global financial crises play a part in the past years. It’s a perfect storm of economic data points all hitting at once.

Labor Market and Wage Dynamics

Today’s labor market remains surprisingly resilient. Unemployment remains low, though wage increases have slowed from the hot pace of 2022–2023. While that’s helped moderate some price pressures, strong consumer demand has kept upward pressure on essentials like housing, food, and services.

For retirees and those near retirement, this inflationary environment poses serious challenges. At just 3% annual inflation, the cost of living nearly doubles over 25 years. If, as some predict, inflation averages closer to 4–5%, the retirement savings needed to maintain your lifestyle could balloon to five or six million dollars for many households. This is up from the two million often cited a few years ago.

Housing: A Stubborn Source of Inflation

Housing remains one of the most persistent drivers of inflation. While home price growth has slowed, affordability remains a crisis. Mortgage rates, even after moderating, are still well above their pre-2022 levels, pricing out many first-time buyers. Tight inventory continues to fuel bidding wars on entry-level homes.

As a real-life example, August 2025 had the fastest pace of inflation growth this year. While this was partially driven by changes in the price of the CPI basket, it was also greatly affected by housing.

Historical Data and Parallels

History gives us important context.

• World War II and the Korean War saw demand-pull inflation as economies boomed and supplies ran short.

• The 1970s were marked by cost-push inflation, where oil shocks and wage-price spirals drove prices higher.

• The Iraq and Gulf Wars also saw oil price spikes, hitting consumers and businesses hard.

• The 2008 housing crash reminds us how financial excess and loose lending can collapse the market. It's a cautionary tale that still influences housing policy today.

What’s different now is the combination of these pressures. Political concerns, such as a government shutdown, can also indirectly affect the overall inflation rate.

Inflation Expectations and the Inflation Reduction Act

The Federal Reserve Bank continues to project that inflation will remain elevated above its 2% target for years to come. This is despite aggressive monetary policy and interest rate hikes that have helped cool some price pressures. The Inflation Reduction Act, passed in 2022, laid the groundwork for long-term clean energy investments. Unfortunately, its immediate effect on consumer prices has been modest.

Importantly, investor Ray Dalio has shifted his recent warnings away from specific inflation rate forecasts and toward the broader structural risks facing the U.S. economy. Dalio, along with several senior economists, have expressed deep concern about the nation’s mounting debt burden, warning that without meaningful policy reforms, the U.S. could face a debt crisis that leads to higher interest rates, economic instability, and potentially renewed inflationary pressures.

For investors, this underscores the critical need to build resilient, inflation-aware portfolios. It’s no longer just about watching inflation numbers. It’s about understanding the deeper economic risks that can ripple through markets and affect retirement planning, wealth-building, and investment strategy.

How to Invest During Inflation

Inflation is a challenge in the modern economy, but it's one you can navigate if you pay attention to new data. And here’s where the Rule #1 philosophy comes in.

Our message is clear: diversification alone won’t protect you. Instead, focus on:

• Wonderful businesses: Companies with durable competitive advantages (moats), pricing power, and strong cash flow.

• Commodities and sectors that benefit from inflation: Think energy, agriculture, and select industrials.

• Your own education: Learn how to assess companies, read financial statements, and understand valuations.

And don’t forget to grab the Inflation-Ready Checklist to ensure your portfolio is built to last.

Final Takeaway

While inflation has moderated from its peak, it’s not going away anytime soon. The key for investors is to adapt: focus on businesses that can thrive in this environment. Stay informed of every monthly increase and observe the performance of the businesses you invest in. Did they do well in the previous month? How about the previous year? Build a portfolio designed to preserve and grow your wealth over the long term.

Remember, economic growth isn’t always smooth, and price stability is never guaranteed. But with the right mindset and a solid investment strategy, you can weather the ups and downs of inflation, whatever the future holds.

If you’re curious about the latest economic data, want to stay ahead of price changes, or just need help navigating higher prices, keep following our blog for more updates. Together, we can make sense of the numbers and make smart decisions for our financial future.