Inflation fell below 3% in July 2024, the first time it has fallen below that level in more than three years.
While many areas of the U.S. economy are deflating — meaning their prices are still rising, albeit at a slower rate — some have been completely deflated. That means their prices have actually fallen.
Deflation occurred mostly in physical goods, although it also appeared in categories such as airline tickets, gasoline and various food items, according to the consumer price index.
These are “micropockets” of deflation, said Joe Seydl, senior markets economist at JP Morgan Private Bank.
But the deflationary dynamics are less widespread than they were at the start of the pandemic, when the unfolding of distorted supply and demand dynamics made them more pronounced, economists said.
“Overall, deflation for a range of items is becoming less widespread,” said Mark Zandi, chief economist at Moody’s.
Consumers should not expect a broad, sustained drop in prices across the U.S. economy. That usually doesn’t happen unless there’s a recession, economists said.
Why commodity prices have fallen
“Essential” goods — commodity prices excluding those related to food and energy — have fallen by about 2% since July 2023, on average, according to CPI data.
They fell 0.3% in the month from June to July 2024.
Demand for physical goods soared 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.
The health crisis also disrupted global supply chains, meaning products weren’t hitting shelves as quickly as consumers wanted.
This supply and demand dynamic has driven up prices.
The environment, however, has changed.
By this point, the initial pandemic-era mania of consumers fixing up their homes and upgrading their home offices has subsided, cooling prices. Supply chain issues have also largely unraveled, economists said.
Prices for furniture and bedding have fallen more than 5% since July 2023, according to CPI data. Prices also fell last year for dishes and cutlery (down about 8%), laundry equipment (-6%), non-electric kitchen appliances (-10%), toys (-3%) and tools and hardware (-1%), according to the CPI.
Clothing prices also fell, for example for men’s and women’s outerwear (-12% and -4% respectively) and clothing for babies and young children (-4%).
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New and used vehicle prices have fallen 1% and 11%, respectively, since July 2023. Car and truck rental prices have fallen about 6%.
Car prices were among the first to rise as the economy largely reopened in early 2021 amid a shortage of semiconductor chips essential for manufacturing.
“Auto prices remain under pressure due to improving inventory and high 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 tame high inflation. Economists expect central bank officials to start cutting rates at their next policy meeting in September.
Aside from supply and demand dynamics, the U.S. dollar’s strength against other global currencies has also helped keep a lid on goods prices, economists said. That makes it cheaper for U.S. companies to import items from overseas since the dollar can buy more.
Longer-term forces such as globalization also helped, boosting imports of lower-priced goods from China, economists said.
Deflation for airfare, food and electronics
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Airfares fell about 3% last year, according to CPI data.
The drop is partly attributable to a decline in jet fuel prices, said Stephen Brown, deputy chief economist for North America at Capital Economics. Average jet fuel prices have fallen about 17% from a year ago, according to the International Air Transport Association.
Airlines have also been increasing the number of seats available on domestic routes, particularly with larger planes, Hayley Berg, chief economist at travel site Hopper, wrote in April.
This summer, “we’ve seen airlines repeatedly slash prices on many routes for travel in the coming months,” wrote Gunnar Olson, flight deals analyst at Thrifty Traveler. “That’s led us to declare this the best summer ever for travel.”
Food prices fell for items such as cereals, rice, bread, ham, fish, cheese, ice cream, potatoes, apples, bananas, margarine and snack foods, according to CPI data.
Each grocery item has its own supply and demand dynamics that can influence prices, economists said. For example, apple prices deflated nearly 15% last year due to an oversupply.
Additionally, there have been more price promotions at grocery stores lately, with some “major retailers recently announcing price cuts that are likely to put downward pressure on competitors’ prices,” Wells Fargo’s House and George wrote.
The deflationary dynamics of other categories may only be happening on paper.
For example, in CPI data, the Bureau of Labor Statistics controls for quality improvements over time. Electronics like televisions, cell phones, and computers continually improve, meaning consumers generally get more for the same amount of money.
