Inflation has significantly slowed down since reaching its peak two years ago, leading to some prices decreasing for consumers in the U.S. economy.
Deflation refers to the speed at which prices are dropping for consumer goods or services, the opposite of inflation which looks at how quickly prices are rising.
Economists point out that much of the deflation in the past year is due to physical goods, as supply and demand levels disrupted during the pandemic start to normalize.
According to the consumer price index, which is a significant measure of inflation, the prices of commodity goods (excluding food and energy) known as “core” goods, have decreased on average by 1.8% since June 2023.
Olivia Cross, a North America economist at Capital Economics, highlighted that there have been deflation trends in various categories of core goods, suggesting a broad-based impact that is expected to continue for some time.
Prices of gasoline and many grocery items have also experienced declines.
Despite these changes, economists caution that consumers should not anticipate a widespread and sustained drop in prices across the U.S. economy, as this typically only occurs during a recession.
Reasons for the Decrease in Prices for Goods
The spike in demand for physical goods at the beginning of the Covid pandemic due to consumer restrictions on activities like concerts, travel, and dining out, combined with global supply chain disruptions, led to price increases.
However, this situation has changed since then. The initial surge in consumer spending on home improvements and home offices has subsided, cooling prices. Supply chain challenges have also largely been resolved, according to economists.
From June 2023 onwards, consumers have witnessed price decreases in various goods such as home furniture, appliances, toys, dishes, flatware, and outdoor equipment.
In addition to supply-demand factors, the strength of the U.S. dollar against other currencies has contributed to price stabilization for goods, making it more affordable for U.S. companies to import items from abroad.
Long-term trends like globalization, including importing lower-cost goods from China, have also played a role in keeping prices in check, although potential shifts towards higher tariffs and reduced free trade could impact prices significantly, economists noted.
Factors Behind the Decline in Food, Travel, and Electronics Prices
Prices have also dropped for items such as food, travel, and electronics.
According to CPI data, grocery prices for products like ham, rice, potatoes, coffee, milk, and cheese have decreased.
Each grocery item has its supply-demand dynamics influencing pricing, with factors like oversupply causing a decrease in apple prices by 12%, while egg prices surged due to a bird flu outbreak in 2022.
Gasoline prices have fallen by 2.5% in the past year due to factors like weak demand, increased supply, and lower oil costs, as reported by AAA.
Travel costs have decreased for airline fares (down 5.1% annually) and hotel rates (down 2.8%), along with car rental rates (down 6.3%) since June 2023, driven by factors such as more available seats for travelers.
Consumers are displaying increased price sensitivity, prompting retailers to be more cautious in their pricing strategies, economists observed.
For instance, grocery stores have been offering more price promotions recently, with some major retailers announcing price cuts that could impact competitors’ pricing.
In some cases, deflationary trends might only be on paper. For example, the Bureau of Labor Statistics adjusts for quality enhancements over time in CPI data, reflecting improvements in electronics like televisions, cellphones, and computers, where consumers get more for their money, leading to apparent price declines.
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