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Inflation cooled below 3% in July 2024, falling below that mark for the first time in more than three years.
While many areas of the US economy are experiencing disinflation – that is, prices are still rising, albeit at a slower rate – some areas are experiencing outright deflation, meaning that prices have actually fallen.
According to the Consumer Price Index, deflation occurred primarily in physical goods, although it also occurred in categories such as airfares, gasoline, and various food items.
These are “micro-niches” of deflation, said Joe Seydl, chief market economist at JP Morgan Private Bank.
However, deflationary dynamics are less widespread than at the beginning of the pandemic, when they were more pronounced due to the unraveling of distorted supply and demand dynamics, economists say.
“By and large, deflation is becoming less broad-based across a range of items,” said Mark Zandi, chief economist at Moody's.
Consumers should not expect a broad and sustained drop in prices across the U.S. economy. That doesn't usually happen unless there's a recession, economists say.
Why commodity prices have fallen
According to consumer price index data, prices for “core goods” – that is, commodity prices excluding food and energy – have fallen by about 2% on average since July 2023.
They fell by 0.3% during the month from June to July 2024.
Demand for physical goods skyrocketed at the start of the Covid-19 pandemic as consumers were confined to their homes and unable to spend money on things like concerts, travel or dining out.
The health crisis also caused disruptions in global supply chains, meaning goods did not reach shelves as quickly as consumers wanted.
This supply and demand dynamic drove prices up.
However, the environment has changed.
By this point, the initial pandemic frenzy of consumers renovating their homes and upgrading their home offices has subsided, leading to a drop in prices. Supply chain issues have also largely resolved, economists say.
According to the Consumer Price Index, prices for furniture and bedding have fallen by more than 5% since July 2023. Prices for crockery and cutlery (minus about 8%), laundry equipment (-6%), non-electric cookware (-10%), toys (-3%) and tools and hardware (-1%) have also fallen over the past year, according to the Consumer Price Index.
Prices have also fallen in the clothing sector, for example for men's and women's outerwear (-12% and -4% respectively) and for baby and toddler clothing (-4%).
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Prices for new and used cars have fallen by 1% and 11%, respectively, since July 2023. Rental prices for cars and trucks have fallen by about 6%.
When the economy generally reopened in early 2021, car prices were the first to rise due to a shortage of semiconductor chips critical to production.
“Vehicle prices remain under pressure due to improved inventory levels and increased financing costs,” Sarah House and Aubrey George, economists at Wells Fargo Economics, wrote in a July note.
Higher borrowing costs are the result of the Federal Reserve raising interest rates to curb high inflation. Economists expect central bankers to begin cutting interest rates at their next meeting in September.
Aside from supply and demand dynamics, the strength of the US dollar relative to other global currencies has also helped keep prices of goods in check, economists said. This makes it less expensive for US companies to import goods from abroad because the dollar can bring in more money.
Long-term factors such as globalization have also contributed to increased imports of cheap goods from China, economists say.
Deflation in airfares, food and electronics
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According to consumer price index data, airfares fell by about 3 percent last year.
The decline was partly due to a drop in jet fuel prices, said Stephen Brown, deputy chief economist for North America at Capital Economics. The average jet fuel price has fallen by about 17 percent compared to last year, according to the International Air Transport Association.
Airlines have also increased the number of available seats on domestic routes, largely by using larger aircraft, Hayley Berg, chief economist at travel website Hopper, wrote in April.
This summer, “airlines have repeatedly cut prices for travel over the next few months on many routes,” wrote Gunnar Olson, airfare analyst at Thrifty Traveler. “That has led us to declare that this is the best summer ever for travel.”
According to Consumer Price Index data, food prices have fallen for products such as cereals, rice, bread, ham, fish, cheese, ice cream, potatoes, apples, bananas, margarine and snacks.
Each food item has its own supply and demand dynamics that can affect pricing, economists say. For example, apple prices have fallen nearly 15 percent in the past year due to oversupply.
In addition, there have been more price promotions in grocery stores recently, with some “major retailers recently announcing price cuts that are likely to put pressure on competitors' pricing,” wrote House and George of Wells Fargo.
The deflationary dynamics of other categories may exist only on paper.
For example, the Bureau of Labor Statistics takes into account quality improvements over time in its CPI data. Electronics such as televisions, cell phones and computers are constantly getting better, meaning consumers generally get more for the same money.
This is reflected in a decline in prices in the CPI data.