The ‘Toothpaste Effect’: Why Lower Inflation Still Hurts the Middle Class
Even when inflation slows, many Americans don’t feel relief at the checkout line – and there’s a simple reason for it: Prices don’t rewind.
The latest Consumer Price Index (CPI) shows prices rose 3.3% over the past year through March – well below the 9.1% peak in June 2022. However, that doesn't mean extra wiggle room in our budgets. This is due to a concept one financial expert calls the “Toothpaste Effect." It helps explain why even “cooling” inflation can still feel like a squeeze – especially for middle-class households trying to cover the basics.
Here's why even modest inflation compounds financial stress for the typical household.
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What the 'Toothpaste Effect' Is – and Why It Matters
When inflation is on the downswing, you might expect extra breathing room in your budget. But that rarely happens in real life, said Benjamin Howarth, a financial advisor at Barnum Financial Group. That's because yesterday's price increases don't disappear just because inflation comes down.
"Have you ever accidentally squeezed the toothpaste tube too hard and more than you needed came squirting out? No matter how hard you try, you're not going to get that toothpaste back in the tube," he said. "It’s been the same story with inflation's effects on our everyday budgets."
In other words, inflation slowing doesn’t mean prices are falling – it means they’re rising more slowly than before. The sticker shock may ease, but the higher baseline remains. That’s why families can look at a CPI headline and still feel like something doesn’t add up.
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Why Lower Inflation Can Still Pack a Financial Punch
When people hear “inflation is down,” they assume costs should go down, too. But inflation is a rate of change. Once prices rise, the new level becomes the starting point for whatever happens next.
"Past price increases accumulate, and future inflation builds on that higher base," Howarth said. "The effect on your budget is that the extra cost from the previous year’s inflation is compounding."
Here's a simple example: Five years after the pandemic, a $100 bag of groceries costs close to $125. That higher amount becomes the new “normal” you’re budgeting against.
"It’s not so much the pace of inflation as the compound effect of inflation building on itself – hence, you can’t get the toothpaste back in the tube," Howarth said.
Why the Middle Class Feels Inflation More Than Higher Earners
This compounding effect doesn’t hit every household the same way. Middle-class families often spend a larger share of their take-home pay on essentials, so there’s less wiggle room when everyday costs rise (and then stay high).
"If that $100 bag of groceries goes to $125 over five years, a wealthy family likely won’t feel that in their budget as much," Howarth said, "but a middle-class family doesn’t have as much extra disposable income to handle the increases."
And it’s not just price increases in one category causing the strain – the problem is the pileup across multiple recurring expenses.
"It’s gas, oil, takeout, car repairs, home maintenance, rent, electricity, health insurance – all of these items have gone up," Howarth said. "The 'toothpaste effect' has hit all of these, and the compounding of the inflation is just too great for the middle-class family to bear."
Even if inflation is nowhere near the 2022 peak, households can still feel like they’re falling behind because the costs they’re juggling today are built on the increases of the last few years.
"That middle-class family is already teetering on the edge of not making ends meet," Howarth said.
How To Reduce Financial Strain When Prices Stay Elevated
There’s no single fix for a high-cost reality, but you can reduce the stress and regain control by building a realistic budget.
"Get granular," Howarth said. "Control your money – don’t let it control you."
One approach he recommends is a modern version of the “envelope system” – using separate checking accounts instead of cash envelopes – to keep spending aligned with priorities.
"Create your budget and organize it into categories: fixed bills, variable bills, an emergency fund and a 'you' bucket," Howarth said.
Here’s how to set it up in a way that’s clear and easy to maintain:
Fixed-bills account: Create “Envelope 1” as a checking account for all of your fixed bills, such as mortgage or rent and your car payment. Set up a direct deposit from your paycheck to this account each pay period so that all of the fixed bills are paid automatically.
Variable spending account: Set up “Envelope 2” to pay all of your variable bills, such as gas, groceries and electricity. These expenses are normally around the same amount each month, but not exactly the same. Set up a direct deposit from your paycheck to have enough to pay all of these bills automatically.
Emergency fund: Deposit anything left over into your emergency savings fund. Build up three to six months' worth of savings for expenses.
"You" bucket: Lastly, the “you” bucket is for whatever is left. The key is not to raid the other buckets for these discretionary expenses.
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Once your budgeting system is up and running, you can usually find savings that don’t feel painful. Howarth recommends doing a yearly budget audit to spot subscriptions and recurring charges you no longer need or use.
"Can you revisit your cellphone bill? How often do you buy that cup of coffee on your way to work?" Howarth asked. "Every bit helps you to handle that toothpaste effect."
Next, look for ways to save by using workplace benefits that many people overlook – especially accounts with tax advantages.
"Look into programs like workplace dependent care accounts if you have young children," Howarth advised. "These allow you to save money tax-free to pay for costs like daycare. Possibly use a health savings account (HSA) or flexible spending account (FSA) to pay for deductibles or prescriptions on a tax-free basis. Instead of going to a walk-in clinic for a cold or minor illness, consider a telehealth exam with a lower co-pay."
Remember That Small Steps Add Up
Inflation can cool, but the higher price level often sticks – and that’s why relief doesn’t always show up right away, even when the headlines improve. Still, small steps can add up when it comes to fighting back against the "toothpaste effect," especially when you build a system that makes spending predictable and protects your essentials.
"It’s a game of inches, and if you can do a lot of little things to put yourself in a better financial position, it all adds up," Howarth said. "The last piece of advice is to get some help if you need it. A successful relationship with money doesn’t happen by chance; it takes work. A financial advisor can help you determine where you are now and get you on the right path with tips tailored to your individual situation."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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