In July 2024, the U.S. economy saw a significant drop in inflation, dipping below 3% for the first time in over three years. While many sectors are experiencing dis-inflation, meaning prices are still rising but at a slower rate, some areas are actually seeing deflation, with prices decreasing. This deflation has mainly been observed in physical goods, as well as in categories such as airline fares, gasoline, and certain food items, according to the consumer price index.
Micro Pockets of Deflation
Joe Seydl, senior markets economist at J.P. Morgan Private Bank, described the deflation as “micro pockets” occurring within the economy. However, economists note that the current deflationary trend is less widespread compared to earlier in the pandemic. The complex interplay of supply and demand dynamics during the pandemic exacerbated deflation, but as the economy stabilizes, the situation is evolving.
Mark Zandi, chief economist of Moody’s, remarked that the deflation for various items is becoming increasingly less broad-based. This suggests that consumers should not anticipate a widespread and sustained decline in prices across the U.S. economy unless a recession occurs, according to economists.
Factors Contributing to Deflation
The decline in prices for core goods, which exclude food and energy-related commodities, has averaged around 2% since July 2023 based on CPI data. These goods experienced a 0.3% drop from June to July 2024. The surge in demand for physical goods at the onset of the Covid-19 pandemic, coupled with disrupted supply chains, led to increased prices.
However, as the pandemic situation evolved and consumer behavior shifted, the demand for certain goods subsided, resulting in price reductions. Supply chain issues have also largely resolved, further contributing to the deflationary trend. For instance, furniture and bedding prices have decreased by more than 5% since July 2023, while prices for items like dishes, laundry equipment, cookware, toys, and tools have also seen declines, according to CPI data.
Apparel prices have similarly dropped, with reductions in men’s and women’s outerwear, as well as infants’ and toddlers’ clothing. The deflationary trend has extended to the automotive sector, with new and used vehicle prices decreasing by 1% and 11%, respectively, since July 2023. Car and truck rental prices have also deflated by approximately 6%.
Impact of Financing Costs and Federal Reserve Policy
Economists Sarah House and Aubrey George from Wells Fargo Economics noted that vehicle prices remain under pressure due to improved inventory levels and elevated financing costs. The Federal Reserve’s decision to raise interest rates in response to high inflation has contributed to higher financing costs, prompting expectations that rate cuts may occur at the upcoming policy meeting in September.
In addition to supply-demand dynamics, the strength of the U.S. dollar relative to other global currencies has helped curb prices for goods. This favorable exchange rate makes it more cost-effective for U.S. companies to import goods from overseas. Long-term factors like globalization, including increased imports of lower-priced goods from countries like China, have also played a role in price moderation.
Deflation Across Various Categories
Airline fares have declined by approximately 3% over the past year, attributed in part to lower jet fuel prices. According to Stephen Brown, deputy chief North America economist at Capital Economics, the average price of aviation jet fuel has dropped by about 17% compared to the previous year. Airlines have also expanded seat availability on domestic routes by utilizing larger aircraft, contributing to lower fares.
Grocery prices have seen reductions in items such as cereal, rice, bread, ham, fish, cheese, ice cream, potatoes, apples, bananas, margarine, and snacks, as reported by CPI data. Each grocery item is subject to its own supply and demand dynamics influencing pricing. For example, an oversupply of apples has led to a nearly 15% decrease in apple prices over the past year.
Furthermore, recent price promotions at grocery stores have intensified competition, with major retailers announcing price cuts that are expected to impact competitors’ pricing. The deflationary dynamics observed in certain categories may be driven by quality improvements over time. For instance, electronics like televisions, cellphones, and computers continually enhance their features, providing consumers with more value for the same price, resulting in apparent price declines reflected in the CPI data.
Conclusion
In conclusion, the deflationary trend experienced in July 2024 reflects a complex interplay of supply and demand dynamics, consumer behavior shifts, and external factors like exchange rates and global economic forces. While deflation has occurred in specific sectors such as physical goods, airline fares, and groceries, the overall economic landscape remains stable. As economists monitor inflation trends and the Federal Reserve’s policy decisions, consumers can expect fluctuations in prices across different categories but should not anticipate a broad and sustained decline in prices unless significant economic shifts occur.
