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Inflation cooled in August and fell to its lowest level since February 2021, which was around the time the consumer price index began to rise during the pandemic era.
This broad trend in the U.S. economy — a declining but still positive inflation rate — is known as “disinflation.” It means that, overall, the average prices of goods and services are rising, just at a slower pace.
However, there are also pockets of “deflation,” where the inflation rate is negative, meaning prices are falling.
Deflation has occurred primarily in physical goods such as cars and appliances, although it has also appeared in categories such as gasoline and various groceries over the past year, according to the consumer price index.
That said, consumers should not expect — or even hope for — a broad, sustained drop in prices across the U.S. economy. That doesn't typically happen unless there's a recession, economists said.
'A huge shift in demand'
Prices of “basic” goods (i.e. raw materials, excluding those related to food and energy) have deflated by approximately 2% since August 2023, on average, according to CPI data.
They fell by 0.2% during the month, from July to August 2024.
The downward momentum in goods prices has largely been driven by a “normalization” of supply and demand trends that spiraled out of control during the pandemic, said Stephen Brown, deputy chief economist for North America at Capital Economics.
Demand for physical goods soared in the early days of the Covid-19 pandemic as consumers were confined to their homes and unable to spend on things like concerts, travel or eating out. Households also had more discretionary income due to reduced spending coupled with federal aid.
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“We saw a big shift in demand, in terms of the types of things people were spending on, and people weren't going out as much,” said Sarah House, senior economist at Wells Fargo Economics.
The pandemic also paralyzed global supply chains, meaning products weren't reaching shelves as quickly as consumers wanted them.
This dynamic of supply and demand pushed up prices.
But those economic contortions have largely eased and prices have deflated as a result, economists said.
Where prices have deflated
For example, prices have declined by about 5% for furniture and bedding and 3% for appliances since August 2023, according to CPI data.
Also falling were prices for tools, hardware and outdoor equipment, down 3%, toys, down 3%, and clothing items such as men's suits and outerwear, down 10%, women's outerwear, down 9% and footwear, down 1%.
New and used vehicle prices have fallen by 1% and 10%, respectively, since August 2023. Rental prices for cars and trucks have deflated by about 8%.
Car prices were among the first to rise as the economy broadly reopened in early 2021, amid a shortage of semiconductor chips essential for manufacturing.
The recent declines in auto prices are largely due to “the inventory picture improving across the vehicle segment overall,” House said. Higher financing costs have also dampened consumer demand, economists said.
Beyond the dynamics of supply and demand, the strength of the US dollar relating to According to economists, the rise in the value of other world currencies has also helped to keep a lid on the prices of goods. This makes it less expensive for American companies to import goods from abroad, since the dollar can buy more.
Long-term forces such as globalization have also helped, by increasing imports of lower-priced goods from China, economists said.
Airfares have fallen by about 1% over the past year, according to CPI data.
The drop is partly due to a decline in jet fuel prices, said Capital Economics' Brown.
Average prices of aviation fuel They are down around 21% compared to last year, according to the International Air Transport Association.
According to CPI data, food prices have fallen for apples, potatoes, ham, coffee, rice, seafood and bananas. Each food product has its own supply and demand dynamics that can influence prices, economists said.
The deflationary dynamics of other categories may only be occurring on paper.
For example, in the CPI data, the Bureau of Labor Statistics controls to improve quality over time. Electronic products, such as televisions, cell phones, and computers, are continually improving, which means that consumers generally get more for the same amount of money.
This is reflected in a fall in prices in the CPI data.