Physical goods accounted for much of the deflation seen last year, economists say, as supply-demand dynamics disrupted by the pandemic normalize.
Prices of raw materials (excluding food and energy) – known as “basic” commodities – have fallen by an average of 1.8% since June 2023, according to the consumer price index, a key measure of inflation.
“We have seen deflation in basic goods across a number of categories,” said Olivia Cross, North American economist at Capital Economics.
“It’s a pretty general phenomenon,” she added. “I think it’s something that’s likely to continue for some time.”
Gasoline and many grocery items, for example, have also seen their prices drop.
Consumers, however, should not expect a widespread and sustained decline in prices across the U.S. economy. That doesn’t typically happen except in a recession, economists said.
Demand for physical goods soared at the start of the Covid pandemic as consumers were stuck at home and couldn’t spend on things like concerts, travel or dining out.
The health crisis also disrupted global supply chains, meaning goods weren’t hitting shelves as quickly as consumers wanted.
This supply and demand dynamic has driven up prices.
But the environment has changed: The initial pandemic-era enthusiasm for home renovations and home office upgrades has waned, pushing prices down. Supply chain issues have also largely been resolved, economists say.
Since June 2023, consumers have seen prices fall for goods such as home furniture for a living room, kitchen or dining room (prices are down 4.9%), household appliances (-3.6%), toys (-6%), crockery and cutlery (-10.2%) and outdoor equipment such as barbecues and garden supplies (-4.3%).
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Car buyers have also seen new vehicle prices fall about 1% and used vehicle prices fall about 10% over the past year. Vehicle prices were among the first to rise when the economy reopened in early 2021, due to a shortage of semiconductor chips critical to manufacturing.
“Vehicle prices remain under pressure due to improving inventories and elevated financing costs,” Sarah House and Aubrey George, economists at Wells Fargo Economics, wrote in a note this week. (Higher financing costs are a result of the U.S. Federal Reserve raising interest rates to control inflation.)
Aside from supply-demand dynamics, the strength of the U.S. dollar against other global currencies has also helped keep prices of goods in check, economists said. That allows U.S. companies to import goods from abroad more cheaply, since the dollar can buy more.
Long-term factors such as globalization have also contributed to the rise, such as the import of cheap Chinese goods, Cross said. However, higher tariffs and less free trade could lead to a “pretty significant” increase in the price of goods, she added.
Prices have also fallen for items such as food, travel and electronics.
Grocery prices fell for items such as ham, rice, potatoes, coffee, milk and cheese, according to CPI data.
Each grocery product has unique supply and demand dynamics that can influence prices, economists said. For example, apple prices have also fallen 12% over the past year due to oversupply. Egg prices have surged in 2022, largely due to a historic and deadly outbreak of avian flu.
Gasoline prices have also fallen 2.5% over the past year. The recent price decline is the result of “weak gasoline demand, rising supply and lower oil costs,” according to AAA.
Travelers have seen a decline in airfares (prices have fallen 5.1% annually) due to factors such as an increase in the volume of available seats. Hotel rates have also fallen by 2.8% and car rental rates by 6.3% since June 2023.
Consumers also appear more price sensitive, prompting retailers to be a little more cautious, economists said.
For example, there have been more price promotions at grocery stores lately, with some “major retailers recently announcing price cuts that are likely to put pricing pressure on competitors,” Wells Fargo’s House and George wrote.
Elsewhere, some deflationary dynamics may only be occurring on paper.
For example, in the CPI data, the Bureau of Labor Statistics controls for quality improvements over time. Electronic devices such as televisions, cell phones, and computers are continually improving, meaning consumers generally get more for the same amount of money.
This translates into lower prices in the CPI data.
News Source : www.cnbc.com
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