Against the backdrop of easing inflationary pressures, consumers have seen prices of certain goods and services decline in May.
Inflation measures the extent to which consumer prices rise; conversely, deflation measures the extent to which consumer prices drop.
According to a report by CNBC, Joe Seydl, a senior market economist at J.P. Morgan Private Bank, stated that there are some “mini” deflationary trends currently present in the U.S. economy.
Seydl noted that during the pandemic, certain industries experienced significant price increases due to severe supply-demand imbalances. With these supply-demand relationships now easing, prices of goods are gradually normalizing. However, economists point out that Americans would not prefer widespread deflation across the entire U.S. economy.
“Consumers want prices to return to the levels of 2019,” Seydl said. “But unless there is a severe recession, we are unlikely to see that scenario.”
Economists indicate that consumers are largely witnessing price drops in tangible goods such as automobiles, furniture, and household appliances.
For example, based on the Consumer Price Index, prices of furniture and bedding have dropped by 3.7% since May 2023. Prices of laundry equipment, tableware, and outdoor equipment and supplies have decreased by 8.8%, 8.1%, and 5%, respectively.
Over the past year, prices of new cars have also fallen by 1.4%, while prices of used cars and trucks have dropped by 9.3%. With the semiconductor chip shortage, essential for the manufacturing industry, automotive prices initially surged after the economy reopened in early 2021.
During the early stages of the COVID-19 crisis, consumer spending on physical goods soared as individuals were confined at home, unable to spend on services like concerts, travel, or dining out.
Michael Pugliese, a senior economist at Wells Fargo, mentioned, “Much of this money went into purchasing new cars and home improvements.”
The pandemic crisis also disrupted global supply chains, leading to delays in product restocking based on consumer demands, creating a situation of insufficient supply compared to demand that drove up prices.
However, these prices have now reverted to realistic levels. The initial enthusiasm for home renovations and upgrading home offices during the pandemic has waned, contributing to a cooling of prices. Economists highlight that supply chain issues have also largely been alleviated.
For instance, according to data from the U.S. Bureau of Labor Statistics, with the exception of food and energy commodities, prices of physical goods have seen declines nearly every month (except for one) since May 2023. Over the past year, the prices of goods have dropped by 1.7%.
Economists point out that the strength of the U.S. dollar against other global currencies also aids in suppressing commodity prices. The increased purchasing power of the dollar allows U.S. companies to import goods from abroad at lower costs.
According to Federal Reserve data, the Nominal Broad U.S. Dollar Index has reached its highest value pre-pandemic since 2006. This index measures the purchasing power of the U.S. dollar against major trading partner currencies such as the euro, the Canadian dollar, and the Japanese yen.
Over the past year, prices of non-commodity items have also dropped. For instance, prices of ham, rice, fresh fish and seafood, milk, potatoes, coffee, margarine, and cheese have declined. Notably, consumers have seen apple prices drop by 13.2% amid a surge in supply over the past year.
Economists note that each food item exhibits unique supply and demand dynamics, which can influence prices. For example, egg prices surged in 2022 due to a historic outbreak of avian flu, followed by a continuous decline in prices.
Since May 2023, travelers have noticed a 5.9% decrease in airfare prices, 1.7% drop in hotel prices, and an 8.8% decline in car rental prices. For instance, Hayley Berg, chief economist at travel website Hopper, recently mentioned that airlines are increasing seat capacity by using larger aircraft on domestic routes, assisting in creating room for price reductions.
Additionally, there is evidence suggesting that consumers are becoming “more price-sensitive,” as noted by Olivia Cross, a North American economist at Capital Economics research firm. She mentioned that this behavior poses an intuitive challenge for retailers, who may find the need to offer more competitive prices to attract customers.
Elsewhere, some deflationary trends may only exist on paper. For instance, electronic products witness quality improvements over time. In the CPI data, the Bureau of Labor Statistics seems to reflect this. As items like televisions, cellphones, and computers continuously improve, consumers often can purchase products of better quality and more functions for the same amount of money, leading to price declines in the CPI data.