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In July 2024, inflation fell below 3%, the first time it had fallen below that level in more than three years.
While many areas of the U.S. economy are deflating—meaning their prices are still rising, albeit at a slower pace—some areas are outright deflationary. This means their prices have actually dropped.
Deflation has occurred primarily in physical goods, but also in categories such as airline tickets, gasoline and various food items. consumer price index.
These are “small pockets” of deflation, said Joe Seidel, senior market economist at JPMorgan Private Bank.
But economists say deflationary dynamics are less prevalent than in the early days of the pandemic, when the easing of distorted supply and demand dynamics made them more pronounced.
“Broadly speaking, deflation across items is becoming less broad-based,” said Mark Zandi, chief economist at Moody’s.
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
According to CPI data, “core” commodity prices (excluding food and energy-related commodity prices) have fallen by about 2% on average since July 2023.
From June to July 2024, the index fell by 0.3%.
In the early days of the Covid-19 pandemic, demand for physical goods soared as consumers were confined to their homes and unable to spend money at 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, circumstances have changed.
So far, the initial wave of consumers renovating their homes and upgrading 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.
CPI data shows that furniture and bedding prices have fallen by more than 5% since July 2023. Prices also fell last year in cutlery and cutlery (down about 8%), laundry equipment (-6%), non-electric cookware (-10%), toys (-3%) and tools and hardware (-1%). , based on CPI.
Clothing prices also declined, such as men’s and women’s outerwear (-12% and -4% respectively) and babies and toddlers (-4%).
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Since July 2023, new and used car prices have fallen by 1% and 11% respectively.
Car prices were among the first commodities to rise 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 last month.
Higher funding costs are the result of the Federal Reserve raising interest rates to curb high inflation. Economists expect central bank officials to begin cutting interest rates at their next policy meeting in September.
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.
Economists say long-term forces such as globalization, such as more imports of low-priced goods from China, also play a role.
Flights, food and electronics deflation
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Airline fares fell about 3% last year, according to Consumer Price Index (CPI) data.
Stephen Brown, deputy chief economist for North America at Capital Economics, said the decline was partly due to lower jet fuel prices. average jet fuel price dropped That’s an increase of about 17% from last year, according to the International Air Transport Association.
Airlines have also increased the number of seats available on domestic routes, largely by flying larger planes, said Hayley Berg, chief economist at travel website Hopper. wrote April.
This summer, “on a number of occasions we’ve seen airlines slash prices on many travel routes over the coming months,” wrote Gunnar Olson, flight deals analyst at Thrifty Traveler. “This leads us to declare this the best summer ever for travel.”
Prices of groceries such as cereals, rice, bread, ham, fish, cheese, ice cream, potatoes, apples, bananas, margarine and snacks fell, according to Consumer Price Index (CPI) data.
Economists say each grocery item has its own supply and demand dynamics that affect pricing. For example, Apple prices have dropped nearly 15% in the past year. oversupply.
Additionally, Wells Fargo’s House and George wrote that there has been an increase in markdowns in grocery stores recently, with some “major retailers recently announcing price cuts that could put pressure on competitors’ pricing.”
Other categories of deflationary dynamics may only occur on paper.
For example, in the 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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