Where’s the Deflation?

Inflation continues to remain stubbornly high in the US. While Core CPI is down to 3.6%, the lowest it has been in 3 years, this is still well above the Fed’s 2% target (the Fed’s preferred Core PCE is a bit lower at 2.8%). But consumers are tired of the cumulative inflation, which, depending on your preferred gauge of inflation, is somewhere around 20% in the past 4 years. Consumers want to know: will prices ever go down again?

The answer is: Yes, and some prices already have declined!

For example, you can look at broad categories of consumer purchases, such as durable goods, which are down almost 5 percent since the peak in August 2022. Durable goods include items such as used cars (down 17.3 percent since February 2022), furniture (down 6 percent since August 2022), and appliances (down 7.2 percent since March 2023).

We can even jump into the nondurables category and look at specific items, such as groceries which seem to be on everyone’s mind. Here’s a list of items and the price decrease since their peak (I ignore a few items where it is only a purely seasonal cycle that made them cheaper in April 2024):

Spaghetti and macaroni: -4.3% (Feb 2023)
Bacon: -12.8% (Oct 2022)
Chicken legs: -10.6% (Aug 2023)
Chicken breasts: -14.4% (Sept 2022)
Eggs: -40.6% (Jan 2023)
Milk: -8.3% (Nov 2022)
Cheddar cheese: -9.4% (Sep 2022)
Bananas: -2.6% (Sept 2022)
Oranges: -14.7% (Sept 2022)
Lemons: -12.3% (May 2022)
Strawberries: -12.9% in the past year (and down 34.6% since seasonal peak in Dec 2022)
Ground coffee: -6.2% (Dec 2022)

It’s true that this is a cherry-picked list: lots of items are at all-time highs! My goal here is to show that, Yes!, some prices will fall. Others may too in the near future. And while it’s also true that most prices are still well above 2019 levels, that’s not universally true. The April 2024 prices of lemons, strawberries, and tomatoes are roughly equal to their April 2019 prices.

And it’s not just food. Natural gas this January was 20% cheaper than January 2023. Regular unleaded gasoline is down 11.6% from 2 years ago (and down 25% from the peak in Summer 2022, but we’ll wait to see what this summer looks like). Even some services, such as airline fares, are down 6.7% from 2 years ago (and down 16% from June 2022).

Some of these price decreases could be due to factors specific to the production and supply of those goods, but another factor is monetary policy. Broad measures of the money supply such as M2 show a decline of about 4 percent in the past 2 years. That hasn’t yet produced overall deflation, but it has probably contributed to the decline in the goods and services mentioned.

Looking at price changes can only tell us so much though, especially focusing on individual item prices. The big picture is that over the past 4 years, wages have increased more than prices overall across most of the income distribution (only the highest quintile lost out on the race between wages and prices). Falling prices would certainly help this trend continue, but most consumers have more buying power than they did in 2019, even if they don’t feel like they do.