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As inflation continues to decline across the US economy, some consumer categories have fallen into outright deflation.
In other words: Americans are seeing a decline in the prices of some items.
Economists said these declines were largely in physical goods rather than services.
Demand for goods surged at the start of the Covid-19 pandemic as consumers were confined to their homes. The health crisis has also affected global supply chains for these goods. This momentum has pushed up prices. Now they fall back to earth.
“You’ve seen some (price) pullback in some of the categories that were most affected by the shift in consumer demand and also most severely affected by some of the supply chain issues that we’ve seen throughout the pandemic,” according to Sarah House, chief economist at Wells Fargo Economics.
A shift away from spending on goods
For example, average prices have fallen since December 2022 in the following categories, among others: toys (down 4.5%), college textbooks (4.9%), televisions (10.3%), men’s suits, sport coats and outerwear (6% ), sporting goods (2.5%), furniture and bedding (4.3%), and computer software and accessories (9.9%), according to the consumer price index.
“We bought a lot of goods because we couldn’t go out, travel, go to ball games” at the start of the pandemic, said Mark Zandi, chief economist at Moody’s Analytics. “There was a shift from merchandise to things we couldn’t do when we were closed.”
Prices for used cars and trucks also fell, down 1.3%, according to CPI data.
Used and new vehicle prices were among the first to surge when the U.S. economy reopened in early 2021, amid a shortage of semiconductor chips needed for manufacturing.
But used car prices remain more than 30% higher than they were before the pandemic, meaning there is likely still plenty of room for upside, said Andrew Hunter, deputy chief U.S. economist at Capital Economics.
There are other deflationary dynamics
In general, the historically strong U.S. dollar against other global currencies has also helped lower commodity prices, Zandi said. This makes it cheaper for American companies to import goods from overseas because the dollar can buy more.
The nominal broad U.S. dollar index is higher than in any pre-pandemic period dating back to at least 2006, according to data from the U.S. Federal Reserve in early January. The index measures the dollar’s appreciation against the currencies of major U.S. trading partners such as the euro, Canadian dollar, British pound , the Mexican peso and the Japanese yen.
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Falling energy prices also put downward pressure on commodity prices due to lower transportation costs and energy-intensive manufacturing costs, economists said.
However, attacks by Houthi militias on merchant ships in the Red Sea – a major trade route – are causing transport costs to rise, which may lead to a reversal of goods deflation, Zandi said.
Lower energy prices are also putting pressure on reducing the transportation of food to store shelves.
For example, the prices of eggs and salad also fell significantly after rising sharply in 2022. Among the reasons for those initial shocks: a historic U.S. outbreak of bird flu, which is extremely deadly among birds such as egg-laying hens, and an insect-borne virus that raged in California’s Salinas Valley growing region, which accounts for about half of US lettuce production.
How measurement peculiarities affect price data
Elsewhere, certain deflationary dynamics are taking place only on paper.
For example, the US Bureau of Labor Statistics, which compiles the CPI report, checks for quality improvement over time. Electronics such as televisions, cell phones, and computers are constantly improving. Consumers get more for roughly the same amount of money, which shows up as a price drop in the CPI data.
Health insurance, which falls under the “services” of the American economy, is in a similar situation.
The BLS does not estimate health insurance inflation based on consumer premiums. It does so indirectly by measuring insurers’ profits. This is because the quality of insurance varies greatly from person to person. One person’s premium may buy a high value policy while another buys modest coverage.
These differences in quality make it difficult to accurately measure changes in health insurance prices.
Last year’s 27.1% decline in health insurance prices reflects lower profits for insurance companies in 2021 compared to 2020.
These kinds of quality adjustments mean that consumers don’t necessarily see a price drop in the store — just on paper.