Inflation has fallen significantly since peaking two years ago, and the U.S. economy has even been going through periods where prices have fallen for consumers.
Deflation measures how quickly the prices of consumer goods and services are falling. It is the opposite of inflation, which measures how quickly prices are rising.
Economists say most of the deflation over the past year has been driven by physical goods, as demand and supply dynamics disrupted by the pandemic return to normal.
Since June 2023, commodity prices (excluding food and energy-related items) have fallen an average of 1.8%. Consumer Price IndexIt is an important inflation indicator.
“We’ve seen deflation of core commodities in many areas,” said Olivia Cross, North America economist at Capital Economics.
“This is pretty widespread,” she added. “We expect this trend to continue for some time.”
For example, prices of gasoline and many food items have fallen.
But consumers shouldn’t expect widespread, sustained price declines across the U.S. economy, which economists say doesn’t usually happen unless there’s a recession.
Why are commodity prices falling?
Demand for physical goods soared in the early days of the coronavirus pandemic as consumers were stuck at home and couldn’t spend money on things like concerts, travel or dining out.
The health crisis is also Global supply chains have been disrupted, meaning goods are no longer available on store shelves as quickly as consumers would like.
These supply and demand dynamics have driven up prices.
But the environment is changing: The initial frenzy as consumers improved their homes and upgraded their home offices during the pandemic has subsided, prices have stabilized and supply-chain problems have largely been resolved, economists say.
Since June 2023, consumers have seen prices fall for items such as living room, kitchen and dining room home furniture (down 4.9% in price), appliances (-3.6%), toys (-6%), crockery and cutlery (-10.2%) and outdoor equipment such as grills and gardening supplies (-4.3%).
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Car buyers have also seen new-car prices fall by about 1% and used-car prices fall by about 10% over the past year.Auto prices were among the first to surge as the economy broadly reopened in early 2021 amid a shortage of semiconductor chips vital to manufacturing.
“Auto prices remain under pressure from rising inventories and rising financing costs (which come as the Federal Reserve raises interest rates to tame inflation),” Wells Fargo Economics economists Sarah House and Aubrey George wrote in a note this week.
Beyond supply and demand dynamics, economists say the strength of the U.S. dollar against other global currencies also helps keep commodity prices in check, making it cheaper for U.S. companies to import goods from overseas because dollars can buy more.
Mr Cross said longer-term factors such as globalisation, including increased imports of low-cost goods from China, were also contributing, but added that higher tariffs and less free trade could lead to a “fairly significant” rise in commodity prices.
Why food, travel and electronics are experiencing deflation
Prices of food, travel, electronics and more also fell.
Consumer Price Index (CPI) data shows prices of food items such as ham, rice, potatoes, coffee, milk and cheese have fallen.
Economists say each food item has its own supply and demand dynamics that can affect prices — apple prices, for example, have fallen 12% over the past year. OversupplyIn 2022, egg prices skyrocketed due to a historic outbreak of bird flu.
Gasoline prices have also fallen 2.5% over the past year. The recent price decline is the result of “weak gasoline demand, increasing supply and lower crude oil prices.” according to To AAA.
Travelers are experiencing airfare deflation (a 5.1% annual decline). Volume Increased The number of seats available.Hotel rates have also fallen 2.8% since June 2023, and rental car rates have fallen 6.3%.
Consumers also appear to be becoming more price sensitive, which is causing retailers to be a bit more cautious, economists said.
For example, grocery stores have recently been ramping up price-cutting campaigns, and “several major retailers have recently announced price cuts that could put pressure on competitors’ pricing,” Wells Fargo’s House and George wrote.
Elsewhere, deflationary movements may only be happening on paper.
For example, the Bureau of Labor Statistics’ CPI data states: Control Quality improves over time: Electronic devices such as televisions, mobile phones, and computers continually improve, allowing consumers to generally get more for the same amount of money.
This shows up as a drop in prices in the CPI data.
