An RC Willey home furnishings store in Draper, Utah, on August 28, 2023.
George Frey/Bloomberg via Getty Images
Inflation has fallen significantly from its peak during the pandemic. In fact, some categories have fallen into outright deflation, meaning consumers’ prices are falling instead of rising.
According to economists, most of the deflation occurred in physical goods and not in “services.” The former are tangible objects, while the latter are largely things we can experience, like haircuts and vet visits.
Demand for goods surged at the start of the Covid-19 pandemic as consumers were forced to stay at home and unable to spend money on travel or concerts. The health crisis also disrupted global supply chains, causing volumes to fail to keep up with demand for these goods. Such supply and demand dynamics drove prices higher.
Now they fall back to earth.
So-called “core” goods inflation – which excludes food and energy prices, which can be volatile – was minus 0.3% in January 2024 compared to a year earlier, according to the latest consumer price index data released Tuesday by the U.S. Bureau of Labor statistics .
“Supply chains are returning to normal,” said Jay Bryson, chief economist at Wells Fargo Economics. “And on the demand side, there has been some sort of rotation from goods spending back to services spending.”
“We are going back to the pre-Covid era, so to speak,” he added.
A move away from spending on goods
Average prices fell for these physical goods, among others, from January 2023 to January 2024: furniture and bedding (prices fell 2.9%); large household appliances (-7.3%); men’s suits, jackets and outerwear (-5.3%); girls’ clothing (-9%); video and audio products (-5.8%); sporting goods (-1.1%); toys (-4.2%); and college textbooks (-5.7%), according to CPI data.
Prices for used cars and trucks also fell 3.5% last year, according to CPI data.
Prices for used and new cars were among the first to skyrocket as the U.S. economy largely reopened in early 2021 due to a shortage of semiconductor chips essential to manufacturing.
These are the big deflationary factors
“Many factors have combined to push commodity prices lower,” said Mark Zandi, chief economist at Moody’s Analytics.
In addition to normalizing supply-demand dynamics, a historically strong U.S. dollar relative to other global currencies has also helped contain commodity prices, Zandi said. This makes it cheaper for U.S. companies to import goods from overseas because the dollar can buy more.
According to Federal Reserve data, the nominal broad U.S. dollar index is higher than at any time before the pandemic since at least 2006. The index measures the appreciation of the dollar relative to the currencies of the U.S.’s major trading partners, such as the euro, Canada’s Dollar, the British pound, the Mexican peso and the Japanese yen.
Falling energy prices have also put downward pressure on goods prices due to lower transportation and energy-intensive manufacturing costs, economists said. Total energy costs fell by 4.6% last year.
But economists fear that attacks by Houthi militias on merchant ships in the Red Sea – a key trade route – could lead to disruptions in shipping and a reversal of deflation for some goods.
Lower energy prices also put downward pressure on the movement of food to store shelves.
When it comes to food, prices for eggs and salad fell significantly from January 2023 to January 2024 (by 28.6% and 11.7%, respectively), after rising sharply in 2022. Among the reasons for these initial shocks: a historic outbreak of bird flu in the United States, which is extremely deadly to chickens and other birds, and an insect-borne virus that raged in the Salinas Valley growing region of California, which accounts for about half of the population US lettuce production.
However, egg prices have risen again in recent months due to a comeback in bird flu.
Overall food prices rose 1.2% last year, according to CPI data.
Why aren’t services also declining?
The average American spends most of their budget – about two-thirds of it – on services rather than goods.
The services sector of the US economy has experienced disinflation, but has not slipped into deflation like core goods. According to CPI data, inflation in the non-energy services sector is still up 5.4% since January 2023.
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According to economists, service companies are more sensitive to labor costs.
A hot labor market as the economy reopened in 2021 led to worker wage growth rising to its highest level in decades. Average earnings have cooled along with the broader labor market but remain high compared to pre-pandemic baselines, they said.
“The latest [Employment Cost Index] “Wage growth figures for the fourth quarter of 2023 were below 4% on an annual basis (for the first time since the second quarter of 2021), reflecting the better balance between labor demand and supply achieved by the realignment,” it said in a recent outlook the Global Investment Strategy of JP Morgan Group.
However, some service categories have lost value.
For example, airfares fell by 6.4% last year. This is due to factors such as lower fuel costs for airlines and an increase in seating capacity (i.e. the number of seats available to passengers due to increased flight volume) on domestic and international flights, according to Hopper.
How measurement errors can cause deflation
Elsewhere, deflationary dynamics sometimes only take place on paper.
For example, the Bureau of Labor Statistics controls for quality improvements over time in the CPI data. Electronic devices such as televisions, cell phones and computers are getting better and better. Consumers are getting more for roughly the same amount of money, which is reflected in a price decline in the CPI data.
The situation is similar with health insurance, which is part of the service sector of the US economy.
The Bureau of Labor Statistics does not assess health insurance inflation based on consumer premiums. This is done indirectly by measuring insurers’ profits. This is because the quality of insurance varies greatly from person to person. One person’s premiums can buy high-quality coverage, while another person’s premiums can only provide poor coverage.
These differences in quality make it difficult to accurately estimate changes in health insurance prices.
Health insurance prices fell 23.3% last year. This decline reflects lower insurer profits in 2021 compared to 2020.
Such quality adjustments mean that consumers do not necessarily notice price reductions in the store, but only on paper.
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2024-02-14 16:20:49
www.cnbc.com
