Inflation has fallen sharply since its peak two years ago. The U.S. economy is even seeing some price drops for consumers.
Deflation measures the rate at which the price of consumer goods or services decreases. It is the opposite of inflation, which measures how quickly prices are rising.
Economists say physical goods were the main cause of deflation last year. This is happening as supply and demand dynamics that were out of control during the pandemic are returning to normal.
According to statistics, since June 2023, commodity prices (excluding food and energy-related commodities) (so-called “core” commodities) have fallen by an average of 1.8%. consumer price indexa key inflation indicator.
“We’re seeing deflation in core commodities across quite a few categories,” said Olivia Cross, North America economist at Capital Economics.
“It’s pretty broad-based,” she added. “I think we expect this to continue for a while.”
Prices for gasoline and many groceries have also eased.
However, consumers should not expect widespread and sustained price declines across the U.S. economy. Economists say that usually doesn’t happen unless there’s a recession.
Why commodity prices fall
In the early days of the coronavirus pandemic, demand for physical goods surged as consumers were confined to their homes and unable to spend money at events such as concerts, travel or dining out.
health crisis also Global supply chains are in disarray, meaning goods can’t get to shelves as quickly as consumers would like.
This supply and demand dynamic drives up prices.
However, the environment has changed: The initial rush of consumers to renovate their homes and upgrade their home offices during the pandemic has subsided, and prices have cooled along with it. Economists say supply chain issues have also been largely resolved.
Since June 2023, consumers have found furniture for the living room, kitchen or dining room (down 4.9%), appliances (-3.6%), toys (-6%), tableware and cutlery (-10.2%) and outdoor equipment such as Grills and garden supplies (-4.3%).
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Car buyers also found that new car prices fell by more than 1% last year and used car prices dropped by about 10%. Car prices were among the first commodities to surge when the economy fully reopened in early 2021 due to a shortage of semiconductor chips necessary for manufacturing.
“Auto prices remain under pressure from improving inventories and rising financing costs,” Wells Fargo economists Sarah House and Aubrey George wrote in a note this week. (Higher financing costs are the result of the Federal Reserve’s would raise interest rates to curb inflation).
Economists say that in addition to supply and demand dynamics, the dollar’s strength relative to other global currencies is also helping to keep commodity prices in check. This makes it cheaper for U.S. companies to import goods from overseas because dollars can buy more goods.
Long-term forces such as globalization, such as more imports of low-priced goods from China, also help, Cross said. However, she added that a shift to higher tariffs and less free trade could push up commodity prices “quite significantly”.
Why food, travel and electronics are experiencing deflation
Prices for goods such as food, travel and electronics also fell.
Prices for groceries such as ham, rice, potatoes, coffee, milk and cheese fell, according to Consumer Price Index data.
Economists say each grocery item has its own supply and demand dynamics that can affect pricing. For example, since Apple prices have dropped 12% over the past year oversupplyEgg prices are surging in 2022, largely due to a historic outbreak of deadly bird flu.
Gasoline prices have fallen 2.5% over the past year. Recent price weakness is the result of “tepid gasoline demand, increased supply and falling oil costs.” according to to AAA.
Due to things like increase volume Number of seats available. Hotel prices have also fallen 2.8% since June 2023, and car rental prices have fallen 6.3%.
Economists say consumers appear to be more price-sensitive, leading retailers to be more cautious.
For example, Wells Fargo’s Howes and George wrote that there has been a recent increase in markdowns in grocery stores, with some “major retailers recently announcing price cuts that could put pressure on competitors’ pricing.”
Elsewhere, some deflationary dynamics may only occur on paper.
For example, in CPI data, the U.S. Bureau of Labor Statistics control Quality continues to improve over time. Electronics like TVs, cell phones, and computers continue to get better, which means consumers are often getting more for the same money.
This shows up in CPI data as falling prices.
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