Inflation remains a concern in the broader U.S. economy, but there are several sectors experiencing deflation, where consumer prices are declining. One major factor contributing to deflation is the decrease in prices for physical goods such as cars, furniture, appliances, groceries, and travel. The high demand for physical goods during the early days of the Covid-19 pandemic, coupled with global supply chain issues, drove prices up initially. However, as consumer demand has stabilized and supply chain disruptions have eased, prices for goods have started to decrease. Physical goods prices have been in modest deflationary territory for some time now, with prices down 1.3% in the past year.
The decline in prices for home goods such as furniture, home appliances, toys, outdoor equipment, and sporting goods can be attributed to reduced consumer demand as well as the strength of the U.S. dollar relative to other global currencies. The Nominal Broad U.S. Dollar Index has been higher than pre-pandemic levels, making it cheaper for U.S. companies to import goods. While downward pressure on goods prices has eased in recent months as supply-and-demand dynamics have normalized, car, travel, and food prices have also deflated. Prices for new and used vehicles have decreased, along with grocery prices for items such as ham, frozen fish, eggs, milk, cheese, citrus fruits, coffee, and potatoes.
The services side of the U.S. economy has seen more buoyant inflation compared to goods, due in part to relatively strong wage growth. However, travel costs within the services sector have declined, with airfare, hotel, and rental car prices decreasing over the past year. Airlines have increased seat availability by using larger planes, which has helped push down airfare prices. There has also been a correction in the price of jet fuel, a key input cost for airlines. Some deflationary dynamics, such as quality improvements in electronics, may only be visible in CPI data that controls for these improvements over time. As electronics like televisions, cellphones, and computers improve, consumers tend to get more value for their money, leading to price declines in the CPI.
Overall, while inflation remains a concern in the broader economy, certain sectors are experiencing deflation, with consumer prices for physical goods, travel, and groceries decreasing. Factors contributing to deflation include reduced consumer demand, stabilized supply chains, and the strength of the U.S. dollar relative to other currencies. The decline in prices for home goods, vehicles, and groceries has been driven by these factors, along with reduced travel costs within the services sector. It is important for policymakers to closely monitor these divergent trends in inflation and deflation across different sectors of the economy to make informed decisions.
