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Inflation slowed in August, falling to its lowest level since February 2021, around the time the consumer price index began to rise in the pandemic era.
This broader trend in the U.S. economy — that of declining but still positive inflation — is known as “disinflation.” It means that, overall, the average prices of goods and services are rising more slowly.
However, there are some areas that are “deflationary,” where the inflation rate is negative, meaning prices are falling.
According to the Consumer Price Index, deflation is mainly occurring in physical goods such as automobiles and household appliances, but has also been seen in other areas such as gasoline and various food items over the past year.
Still, consumers shouldn’t expect or hope for widespread, sustained price declines across the U.S. economy, which economists say doesn’t usually happen unless there’s a recession.
“Major changes in demand”
Prices of “core” goods, excluding food and energy-related items, have fallen by around 2% on average since August 2023, according to Consumer Price Index (CPI) data.
In the one-month period between July and August 2024, it fell 0.2%.
Stephen Brown, deputy chief economist for North America at Capital Economics, said the downward trend in commodity prices is primarily due to a “normalization” of supply and demand dynamics that were disrupted during the pandemic.
Demand for physical goods soared in the early days of the COVID-19 pandemic as consumers were confined to their homes and couldn’t spend money on things like concerts, travel, and dining out. Spending restraints and federal aid also boosted household disposable income.
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“With people going out less, we’ve seen a big shift in demand in terms of what they’re spending their money on,” said Sarah House, senior economist at Wells Fargo Economics.
The pandemic has also disrupted global supply chains, meaning goods are not arriving on store shelves as quickly as consumers would like.
These supply and demand dynamics have driven up prices.
But economists said those economic distortions have largely been eased, resulting in falling prices.
Where prices fell
For example, CPI data shows that since August 2023, prices for furniture and bedding have fallen by roughly 5%, while prices for household appliances have fallen by 3%.
In addition, sales of tools, hardware and outdoor equipment were down 3%, toys were down 3%, clothing such as men’s suits and outerwear were down 10%, women’s outerwear was down 9%, and footwear was down 1%.
Since August 2023, new and used car prices have fallen 1% and 10%, respectively. Car and truck rental prices have fallen about 8%.
When the economy began to reopen broadly in early 2021, auto prices were among the first to surge amid a shortage of semiconductor chips, essential for manufacturing.
House said the recent drop in auto prices is largely due to “improving inventory conditions across the auto industry.” Higher financing costs are also reducing consumer demand, economists said.
Beyond supply and demand dynamics, economists say the strength of the U.S. dollar against other global currencies also helps keep commodity prices in check, making it cheaper for U.S. companies to import goods from overseas because dollars can buy more.
Economists said longer-term forces such as globalization were also contributing to the recovery by increasing imports of cheaper goods from China.
Airfares have fallen about 1% over the past year, according to CPI data.
Capital Economics’ Brown said the decline was partly due to lower jet fuel prices.
According to the International Air Transport Association, the average price of aviation jet fuel has fallen about 21% since last year.
Consumer Price Index (CPI) data shows that prices of food items like apples, potatoes, ham, coffee, rice, seafood and bananas have fallen. Economists point out that each food item has its own supply and demand dynamics, which can affect prices.
Deflationary trends in other categories may only be happening on paper.
For example, in its CPI data, the Bureau of Labor Statistics controls for improvements in quality over time. Electronic devices such as televisions, cell phones, and computers are continually improving, meaning that consumers can generally get more for the same amount of money.
This shows up as a drop in prices in the CPI data.
