In July 2024, inflation in the United States dropped below 3% for the first time in more than three years. While some areas of the economy are experiencing dis-inflation, with prices rising at a slower rate, there are also instances of outright deflation in certain categories such as physical goods, airline fares, gasoline, and various food items. However, these instances of deflation are considered to be “micro pockets” and are less widespread than earlier in the pandemic when supply-and-demand dynamics were more severely impacted. Economists do not anticipate a broad and sustained fall in prices across the economy unless a recession occurs.
The decline in prices for physical goods can be attributed to various factors. Demand for goods surged at the beginning of the Covid-19 pandemic as consumers shifted their spending habits due to restrictions and supply chain disruptions. However, as supply chains have normalized and the initial craze for home improvement projects has subsided, prices for categories such as furniture, bedding, dishes, cookware, toys, and tools have fallen. Apparel prices for men’s and women’s outerwear as well as infants and toddlers have also decreased. Prices for new and used vehicles have also seen a decline since July 2023.
Car prices, in particular, had surged early in 2021 due to a semiconductor chip shortage, but have since cooled off. Higher financing costs have also contributed to the decline in vehicle prices. The strength of the U.S. dollar relative to other global currencies has also helped rein in prices for goods, making it more affordable for U.S. companies to import items. Long-term forces like globalization have also played a role in importing lower-priced goods from countries like China. Economists anticipate that the Federal Reserve will start cutting interest rates at their next policy meeting to combat high inflation.
In addition to goods, deflationary trends have been seen in other categories such as airfare and food. Airline fares have decreased by about 3% over the past year, partly due to a decline in jet fuel prices. Grocery prices for items like cereal, rice, bread, ham, fish, cheese, ice cream, potatoes, apples, bananas, margarine, and snacks have also fallen. Each grocery item has its own supply-and-demand dynamics influencing pricing, such as a supply glut leading to a decrease in apple prices. Price promotions and retail price cuts have also contributed to deflationary trends in the grocery sector.
While some categories may appear to be experiencing deflation, factors like quality improvements in electronics can also influence pricing. For electronics such as televisions, cellphones, and computers, continual advancements lead to consumers getting more value for the same amount of money, resulting in price declines in the Consumer Price Index data. Overall, economists do not foresee a widespread and sustained fall in prices across the U.S. economy in the absence of a recession.
