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Inflation fell below 3% in July 2024, the first time it had fallen below that level in more than three years.
While many sectors of the U.S. economy are experiencing inflation — meaning prices are still rising, albeit at a slower pace — some sectors are outright deflationary — meaning prices are actually falling.
According to the Consumer Price Index, deflation is occurring primarily in physical goods, but also in areas such as airfares, gasoline and a variety of food items.
These are “little pockets” of deflation, said Joe Seidl, senior market economist at JPMorgan Private Bank.
But economists say deflationary trends are less widespread than they were at the start of the pandemic, when they became more pronounced as distorted supply and demand dynamics were resolved.
“Overall, deflation across a range of items is becoming less widespread,” said Mark Zandi, chief economist at Moody’s.
Consumers shouldn’t expect widespread, sustained price declines across the U.S. economy, which economists say doesn’t usually happen unless there’s a recession.
Why did commodity prices fall?
Prices of “core” goods, excluding food and energy-related items, have fallen by around 2% on average since July 2023, according to Consumer Price Index (CPI) data.
From June to July 2024, it fell 0.3% per month.
Demand for physical goods soared in the early days of the COVID-19 pandemic as consumers were stuck at home and couldn’t spend money on things like concerts, travel or dining out.
The health crisis 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.
However, the environment has changed.
To that end, the initial enthusiasm among consumers to fix up their homes and upgrade their home offices during the pandemic has faded, prices have stabilized and supply chain problems have largely been resolved, economists say.
According to CPI data, prices for furniture and bedding have fallen by more than 5% since July 2023. Prices for crockery and cutlery (down about 8%), laundry supplies (-6%), non-electric cooking appliances (-10%), toys (-3%) and tools and hardware (-1%) have also fallen over the past year, according to the CPI.
Prices of clothing items have also fallen, including men’s and women’s outerwear (-12% and -4%, respectively) and infant clothing (-4%).
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New and used car prices have fallen 1% and 11%, respectively, since July 2023. Car and truck rental prices have fallen about 6%.
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.
“Auto prices remain under pressure due to rising inventories and higher financing costs,” Wells Fargo Economics economists Sarah House and Aubrey George wrote in a July note.
The rising cost of funds comes as the Federal Reserve has raised interest rates to tame high inflation, and economists expect central bank officials to start cutting rates at their next policy meeting in September.
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.
Deflation in airfares, food and electronics
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Airfares have fallen about 3% over the past year, according to CPI data.
Stephen Brown, deputy chief economist for North America at Capital Economics, said the decline was due in part to lower jet fuel prices. The average price of aviation jet fuel has fallen about 17% since last year, according to the International Air Transport Association.
Hayley Berg, chief economist at travel site Hopper, said in April that airlines are adding capacity on domestic flights, primarily by introducing larger planes.
This summer, “we’ve seen airlines slash prices on many routes multiple times for travel over the next few months,” wrote Gunnar Olson, an air travel analyst at Thrifty Traveler. “It’s safe to say this is the best summer ever for travel.”
Consumer Price Index (CPI) data shows that prices of food items such as cereals, rice, bread, ham, fish, cheese, ice cream, potatoes, apples, bananas, margarine and snacks have fallen.
Economists say each food item has its own supply and demand dynamics that can affect prices — apple prices, for example, have fallen about 15% over the past year due to an oversupply.
Additionally, grocery stores have recently been offering more price-cutting promotions, with “several major retailers recently announcing price cuts that could put pressure on competitors’ pricing,” Wells Fargo’s House and George wrote.
Deflationary trends in other categories may only be happening on paper.
For example, in the 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.
