January 2024 Price Declines: One Chart

The Inflation Story: Why Some Prices are Falling

Customers shop at a local RC Willey home furnishings store in Utah, Aug. 28, 2023. Inflation has pulled back from its pandemic-era peak, and in some cases, prices have even fallen into outright deflation. In fact, deflation has largely occurred among physical goods rather than services, which is great news for consumers.

During the early stages of the Covid-19 pandemic, demand for physical goods soared as consumers were confined to their homes and couldn’t spend on travel or events like concerts. In addition, global supply chains were disrupted, meaning the production of goods couldn’t keep up with consumer demand, causing prices to increase. Now, those same prices are falling back to normal levels, which is a win for thrift shoppers everywhere.

In January 2024, “core” goods inflation was at a negative 0.3% relative to the previous year, showing that some physical goods prices are on the decline. Economists believe that this shift is a result of supply chains returning to normal and consumers switching their spending from goods back to services.

But what goods are actually seeing a decline in prices? Furniture, major household appliances, apparel, electronics, and even college textbooks have all experienced a decrease in prices over the past year. Even used cars and trucks are seeing deflation, bringing relief to consumers who have been struggling to find affordable transportation.

There are various reasons for these deflationary trends. For one, a historically strong U.S. dollar relative to other global currencies has made it cheaper for U.S. companies to import goods. Additionally, falling energy prices have put downward pressure on goods prices due to reduced transportation and energy-related manufacturing costs.

However, while physical goods prices are seeing a decrease, the same can’t be said for services. The services sector of the U.S. economy is experiencing disinflation rather than outright deflation. This is due to the fact that services businesses are more sensitive to labor costs, and with a hot job market, labor costs have remained elevated.

Some services categories have seen deflation, such as a decline in airline fares as a result of factors like lower jet fuel costs and an increase in seat capacity. However, other deflationary dynamics are only evident on paper, such as the Bureau of Labor Statistics’ control for quality improvements over time with electronics and health insurance.

In conclusion, the recent decline in prices for physical goods is a promising sign for consumers, but it’s important to recognize that not all prices are falling. With a shift back towards services spending, the consumer inflation landscape is evolving, and it’s essential for us as consumers to be aware of these changes as we navigate our future purchases.

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