U.S. shoppers burned by more than two years of rapid inflation are getting some welcome relief this holiday season. The prices of many products are falling.
Toys are almost 3 per cent cheaper this Christmas than last year, according to government data. Sports goods fell nearly 2%. Prices of big-ticket items have also fallen, with washing machine prices, for example, now down 12 percent compared to a year ago. And eggs, whose prices rose sharply last winter and became a prime example of the country's inflation problems, have fallen 22% over the past year.
Consumer prices are still rising overall, but not at the same pace as a year ago. Most food prices are still higher than a year ago. The same goes for most services, such as restaurant meals, haircuts, and trips to the dentist. And housing costs, the biggest monthly expense for most Americans, continue to rise for both renters and homebuyers. Overall, over the past year, prices for physical goods have remained flat, while prices for services have increased by just over 5%.
Still, economists see curbing prices as a key step toward more firmly ending the high inflation of the past two-and-a-half years. They expect this trend to continue. Most forecasters say that physical product prices will continue to decline next year, especially for long-durable industrial products, which have seen the largest declines in recent years. This should moderate overall price increases.
“We're just at the beginning of that phase, and there should continue to be downward pressure on prices in this category,” said Michelle Meyer, chief economist at Mastercard.
Falling prices for many goods could be a psychological boost for consumers, who are facing a gloomy economy despite low unemployment. After the rapid inflation of the past few years, a slowdown in price growth may not be much to celebrate. But falling prices could be a different story. Especially since some of the biggest recent declines have been in categories that consumers tend to pay most attention to, such as gasoline. (Regular gasoline prices, which topped $5 a gallon nationwide in June 2022, have fallen to an average of just over $3, according to AAA.)
“People will focus on certain prices,” said Neil Mahoney, a Stanford University economist who recently left the Biden administration. “We know that people put too much emphasis on certain things.”
In 2021, prices for many goods soared due to a surge in demand from consumers who received pandemic relief checks and supply chain disruptions that limited the supply of many products, especially from overseas. did.
Many economists initially expected a rapid reversal, but prices instead continued to rise. Supply chains took longer than expected to return to normal, and Russia's invasion of Ukraine sent energy prices soaring in 2022. At the same time, consumer demand for goods remained high, and many companies took advantage of this opportunity to push up prices. increases and inflates profit margins.
But now many of those powers are beginning to wane. Supply chains are almost back to normal. Oil prices have fallen. The economic downturn in China and other countries is suppressing demand for many raw materials, which is spilling over into consumer prices.
Slower demand from U.S. consumers may also be playing a role. The US Federal Reserve has repeatedly raised interest rates since the beginning of last year in an effort to rein in spending and curb inflation. Consumers have shown remarkable resilience so far, but retailers have reported in recent months that shoppers are increasingly trading up to cheaper items or waiting for sales before making purchases. This trend could accelerate if the economy cools further next year.
“Consumers are going to be looking for value, and that's because they are very price sensitive,” Carlos E. Alberini, CEO of fashion retailer Guess, told investors last month. told. The company has “revised some of the pricing structures for all its brands,” he added.
Some toy manufacturers and toy retailers also said they expected sales to be weaker than usual this season and were focusing on promoting the affordability of their products.
Many companies are offering discounts in the form of Black Friday sales and holiday promotions, with some product categories even bigger than previous years. Diamond retail giant Signet Jewelers saw sales decline in the third quarter, and the company recently said it expects sales to be lower this year than last year due to “increased promotional activity.” It was announced that there would be.
“This is a holiday season unlike any other,” Signet Chief Executive Virginia C. Drosos told investors on a conference call this month. He said customers are waiting to buy and looking for deals, rather than shopping early.
Matt Pavic, senior director of innovation and strategy at Rivionix, a company that uses artificial intelligence to help retailers set prices, said companies are trying to lower prices before competitors.
“As prices go down, there will be competition to drive prices down further, and that will pay off,” he said. “Retailers are going to make a real effort to win back consumer trust.”
Still, prices for most products remain well above pre-pandemic prices. The price of 12 eggs was about 50 cents higher than in February 2020. Used car prices, another notable example of pandemic sticker shock, are down more than 10 percent from their peak early last year, but are still 37 percent higher than they were in February 2020.
Prices for services are still rising faster than before the pandemic. Some economists say commodity prices will need to fall further for overall inflation to return to the Federal Reserve's target of 2% a year.
“We need pretty significant deflation, but I wouldn't call what we're seeing “significant,” said Wendy Edelberg, director of the Hamilton Project in the economic policy division of the Brookings Institution. “It’s not historically significant.”
In fact, prices for durable goods had been falling for most of the two decades before the pandemic. Long-term trends such as globalization and automation tend to push manufacturing costs down. Intense competition among retailers, especially with the rise of online shopping, meant that most of those savings were passed on to consumers.
On the other hand, service prices rarely fall. Part of the reason is that wages make up a much larger share of the cost of most services. In the decade before the pandemic, prices of goods were flat or falling while prices of services rose gradually, resulting in a long period of stable, moderate inflation.
Economists do not expect outright deflation, in which prices of goods and services fall. That's good. A sustained general price decline is generally considered economically risky.
There are several reasons. First, in theory, deflation could cause consumers to cut back on spending, leading to a downward spiral. Few people may buy something today that is expected to be cheaper tomorrow. Once deflation takes hold, it can be difficult to break out of it. Japan has been stuck in a deflationary pattern since the late 1990s.
Economist Karen Dynan said: “When economic demand is low, the last thing you want is someone to say, 'I'm not going to buy that car today because it's going to be $600 cheaper in six months.'” . at Harvard University.
Another is that in a world where they can't charge extra, companies are less likely to raise wages. And if wages do not rise or fall, households will find it difficult to continue paying fixed costs such as mortgage interest payments.
But while widespread price declines are a problem, most economists see the more limited price declines currently occurring as a sign that the economy is gradually weathering the disruption caused by the pandemic.
“Supply chains have basically normalized,” said Neil Dutta, head of economic research at Renaissance Macro. “Household demand behavior has basically normalized and the dollar is still quite strong. I don't see why the prices of goods would rise.”
