by American shoppers, hit by more than two years of rapid inflation, are getting welcome relief this holiday season: Prices for many goods are falling.
Toys are almost 3 percent cheaper this Christmas than last, government data shows. Sports equipment is down almost 2 percent. More expensive items are also seeing price drops: Washing machines cost 12 percent less than a year ago, for example. And eggs, whose meteoric price rise last winter became a prime example of the country’s inflation problem, are down 22 percent over the past year.
Consumer prices, as a whole, continue to rise, although not as rapidly as a year ago. Most food still costs more than it did a year ago. The same goes for most services, such as restaurant meals, haircuts, and dental visits. And housing costs, the largest monthly expense for most Americans, continue to rise for both renters and home buyers. Overall, the price of physical goods has remained stable over the past year, while the price of services has increased by just over 5 percent.
Still, economists see the moderation in goods prices as an important step toward putting the high inflation of the past two and a half years more firmly in the rearview mirror. They expect this to continue: Most forecasters say prices for physical goods will continue to fall next year, especially prices for longer-duration manufactured goods, where recent declines have been largest. That should help overall price increases ease.
“We’re pretty much at the beginning of that phase and we should continue to see downward pressure on prices in this category,” said Michelle Meyer, chief economist at Mastercard.
For consumers, who have been tough on the economy despite low unemployment, falling prices for many goods could provide a psychological boost. After the rapid inflation of recent years, a mere slowdown in price increases may not seem like much to celebrate. But seeing prices fall could be a different story, especially since some of the biggest recent declines have been in categories that consumers tend to pay more attention to, such as gasoline. (The price of regular gasoline, which topped $5 per gallon nationally in June 2022, has fallen to just over $3 on average, according to AAA.)
“People are going to look at certain prices,” said Neale Mahoney, a Stanford University economist who recently left a position in the Biden administration. “We know that people will be overweight in certain things.”
The price of many goods soared in 2021, driven by a surge in demand from consumers who were in the midst of pandemic relief controls and by supply chain disruptions that limited the supply of many products, especially from abroad.
Many economists initially expected a quick reversal, but instead prices continued to rise. Supply chains took longer than expected to return to normal and the Russian invasion of Ukraine caused energy prices to spike in 2022. At the same time, consumer demand for goods remained high and many Companies took advantage of the opportunity to boost prices. increases and increases your profit margins.
Now, however, many of those forces are beginning to fade. Supply chains have largely returned to normal. Oil prices have fallen. Economic weakness in China and other countries has slowed demand for many raw materials, which affects consumer prices.
Lower demand from U.S. consumers could also play a role. The Federal Reserve has raised interest rates repeatedly since early last year in an effort to curb spending and control inflation. So far, consumers have proven remarkably resilient, but in recent months retailers have reported that shoppers have increasingly opted for cheaper items or waited for sales before purchasing, trends that could accelerate if the economy it cools even more next year.
“We think the consumer will look for value, and that’s because they are very price sensitive,” Carlos E. Alberini, chief executive of Guess, the fashion retailer, told investors last month. The company has “reviewed part of the pricing structure we have across all brands,” he added.
Some toy makers and retailers that sell toys have also said they expect sales this season to be less strong than in previous years and have leaned toward advertising the affordability of their products.
At many companies, price cuts have taken the form of Black Friday sales and holiday promotions that are larger for some item categories than in previous years. At Signet Jewelers, the big diamond retailer, sales fell in the third quarter, and the company recently said it expected sales this holiday season to be lower than last year, in part because of “elevated promotional activity.”
“It’s been a different holiday season,” Signet CEO Virginia C. Drosos told investors on a conference call this month. Instead of shopping early, customers wait to make purchases and look for deals, she said.
Matt Pavich, senior director of innovation and strategy at Revionics, a company that uses artificial intelligence to help retailers set prices, said companies were trying to reduce prices before their competitors.
“As prices go down, there will be a race to drive prices down further and get the credit for that,” he said. “We’re going to see retailers really trying to regain consumer trust.”
Still, prices for most products remain well above what they were before the pandemic. A dozen eggs cost about 50 cents more than in February 2020. Used car prices, another notable example of the impact of the pandemic, have fallen more than 10 percent from their peak early last year, but They are 37 percent above their level in February 2020.
Prices for services continue to rise faster than before the pandemic. Some economists say goods prices will have to fall even further for headline inflation to return to the Federal Reserve’s target of 2 percent annually.
“We need pretty substantial deflation, and I wouldn’t call what we’re seeing ‘substantial,'” said Wendy Edelberg, director of the Hamilton Project, an economic policy division of the Brookings Institution. “It’s not even substantial in a historical context.”
In fact, durable goods prices fell for much of the two decades preceding the pandemic. Long-term trends, such as globalization and automation, have tended to reduce manufacturing costs. Intense competition among retailers, especially with the rise of online shopping, meant those savings were mostly passed on to consumers.
Service prices, on the other hand, rarely fall, in part because wages account for a much larger proportion of the cost of most services. During the decade before the pandemic, prices of services gradually increased while prices of goods remained stable or fell, resulting in a prolonged period of stable and moderate inflation.
Economists do not expect to see outright deflation, in which prices fall for both goods and services. That’s a good thing: General price declines are generally considered economically dangerous, if they last.
There are a few reasons. For starters, in theory, deflation could prompt consumers to postpone spending, triggering a downward spiral. People are unlikely to buy today what they expect to be cheaper tomorrow. Once deflation takes hold, it can be difficult to escape: Japan has been stuck in a deflationary pattern since the late 1990s.
“When demand in the economy is weak, the last thing you want is for someone to say, ‘I’m not going to buy that car today because it will be $600 less expensive in six months,'” said Karen Dynan, an economist. at Harvard.
On the other hand, companies are unlikely to increase wages in a world where they cannot charge more. And if wages don’t rise (or even fall), it will be harder for households to keep up with fixed bills, such as mortgage interest payments.
But while widespread price declines are a problem, most economists see the more limited declines occurring now as a sign that the economy is gradually overcoming the shocks of the pandemic.
“Supply chains have basically normalized,” said Neil Dutta, head of economic research at Renaissance Macro. “The behavior of household demand has basically normalized, the dollar is still quite strong. “I don’t see any reason why the prices of goods should go up.”
