D3sign | Moment | Getty Images
Inflation slowed in August and fell to its lowest level since February 2021, when the consumer price index began to rise during the pandemic era.
This broad trend in the U.S. economy—a declining but positive inflation rate—is known as “deflation.” It means that the average prices of goods and services as a whole are rising, but at a slower pace.
But there are also pockets of “deflation,” where the inflation rate is negative, meaning prices are falling.
The contraction has occurred largely in physical goods such as cars and home appliances, although it has also appeared in categories such as gasoline and various food items over the past year, according to the Consumer Price Index.
However, consumers should not expect—or welcome—a broad, sustained decline in prices across the U.S. economy. Economists say that typically occurs only in a recession.
“A major shift in demand”
Prices of “core” goods — basic goods excluding those related to food and energy — have fallen by about 2% since August 2023, on average, according to consumer price index data.
It decreased by 0.2% during the month, from July to August 2024.
The dynamic of lower commodity prices is largely due to a “normalization” of supply and demand trends that got out of hand during the pandemic, said Stephen Brown, deputy chief economist for North America at Capital Economics.
Demand for physical goods surged in the early days of the COVID-19 pandemic as consumers were confined to their homes and unable to spend on things like concerts, travel or dining out. Households also received more discretionary income due to a decline in spending coupled with federal aid.
More Personal Finance:
Social Security cost-of-living increase may be lowest since 2021
Why It's Not Always Exciting to Be a Millionaire
“Vibrations” Ends
“We’ve seen a huge shift in demand, in terms of the kind of things people are spending on, where they’re not going out as much,” said Sarah House, senior economist at Wells Fargo Economics.
The pandemic has also disrupted global supply chains, meaning goods are no longer arriving on shelves as quickly as consumers want.
These supply and demand dynamics have led to higher prices.
However, these economic distortions have largely receded, and prices have fallen as a result, economists say.
Where prices have fallen
For example, prices of furniture and bedding have fallen by about 5%, and home appliances by about 3% since August 2023, according to CPI data.
Sales of outdoor tools, appliances and equipment also fell by 3%, toys by 3%, clothing, such as men's suits and outerwear, by 10%, women's outerwear by 9%, and footwear by 1%.
New and used car prices have fallen by 1% and 10%, respectively, since August 2023. Car and truck rental prices have also fallen by about 8%.
Car prices were among the first to rise when the economy broadly reopened in early 2021, amid a shortage of semiconductor chips essential for manufacturing.
House said the recent declines in auto prices were largely due to “an improved inventory picture in the overall vehicle space.” Economists said higher financing costs also dampened consumer demand.
Beyond supply and demand dynamics, the strength of the U.S. dollar relative to other global currencies has also helped to keep a lid on commodity prices, economists say. That makes it cheaper for U.S. companies to import goods from abroad, because the dollar can buy more.
Economists said long-term forces such as globalization also helped, by increasing imports of more low-priced goods from China.
Airfare prices fell about 1% over the past year, according to consumer price index data.
The decline is partly due to lower jet fuel prices, said Brown of Capital Economics.
Jet fuel prices are down on average about 21% from last year, according to the International Air Transport Association.
According to the Consumer Price Index data, grocery prices fell for items such as apples, potatoes, pork, coffee, rice, seafood and bananas. Economists said each grocery item has its own supply and demand dynamics that can affect prices.
The contraction dynamics in other categories may be happening only on paper.
For example, in the Consumer Price Index data, the Bureau of Labor Statistics monitors improvements in quality over time. Electronic devices such as televisions, cell phones, and computers are constantly improving, which means that consumers generally get more for the same amount of money.
This is shown as a decline in prices in the Consumer Price Index data.
