Rosalind Evans
In May 2024, U.S. consumers experienced unexpected price drops in several goods and services, reflecting localized deflation amid broader easing inflationary trends. While inflation measures the rate at which consumer prices rise, deflation is the rate at which they decline. Joe Seydl, a senior markets economist at J.P. Morgan Private Bank, highlighted these “micro pockets” of deflation, which are linked to the extreme supply-demand imbalances seen during the COVID-19 pandemic. As these dynamics normalize, prices stabilize, though deflation on a broader scale remains unlikely without a significant recession.
Deflation in Physical Goods: A Market Adjustment
Consumers have noticed price reductions in various physical goods, including cars, furniture, and appliances. The consumer price index indicates a 3.7% drop in prices for furniture and bedding since May 2023. Prices for laundry equipment, dishes, flatware, and outdoor equipment have also seen declines of 8.8%, 8.1%, and 5%, respectively. Furthermore, new car prices fell by 1.4%, while used and truck prices dropped by 9.3% over the past year. Michael Pugliese from Wells Fargo Economics explains, “Much of that funding found itself in new cars and home renovations.” The pandemic’s initial supply chain disruptions and subsequent consumer demand spikes for goods have now receded, cooling prices substantially.
The Role of Supply Chain Dynamics
The Covid-19 pandemic disrupted global supply chains, leading to shortages and delayed goods. This scarcity spurred price hikes for many items. These disruptions have mostly unwound, so prices have returned to more typical levels. According to Bureau of Labor Statistics data, physical goods prices, excluding food and energy, have deflated in only one month since May 2023. This trend shows a 1.7% decrease over the past year. Additionally, the strong U.S. dollar has made imports cheaper, further helping to stabilize prices. The Nominal Broad U.S. Dollar Index, higher than pre-pandemic levels, underscores this effect, making it cost-effective for U.S. companies to import goods.
Grocery and Travel Prices: A Mixed Picture
Deflation extends beyond physical goods to specific non-good categories. Grocery prices have decreased, with items like ham, rice, fresh fish, seafood, milk, potatoes, coffee, margarine, and cheese becoming cheaper. Apple prices, for instance, have fallen by 13.2% year-over-year. Unique supply-and-demand dynamics influence each grocery item’s pricing. For example, egg prices surged in 2022 due to a severe bird flu outbreak but have since dropped.
Travel-related costs have also declined, with airline fares down by 5.9%, hotel rates by 1.7%, and car rental prices by 8.8% since May 2023. Hayley Berg of Hopper notes that airlines have increased seat capacities with larger planes, driving down prices. Furthermore, consumers are becoming more price-sensitive, prompting retailers to adjust prices to attract customers, according to Olivia Cross, an economist at Capital Economics.
The Complexity of Deflation in Electronics
In electronics, deflation is sometimes more apparent than real. The Bureau of Labor Statistics adjusts the Consumer Price Index (CPI) to account for quality improvements over time. As a result, items like televisions, cellphones, and computers show price declines, even though they offer better features and performance. This adjustment means consumers get more value for their money, which is reflected in the CPI data.
Deflation Without a Major Recession?
While certain goods and services are experiencing deflation, broad deflation across the U.S. economy is not anticipated unless a significant recession occurs. Joe Seydl succinctly states, “Consumers would love to have the prices they had back in 2019. But we very likely won’t see that unless we have a major recession.” These localized deflationary trends must be closely monitored as the economy adjusts to understand their broader implications.
