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Those declines largely affected physical goods rather than services, economists said.
Demand for goods surged at the start of the Covid-19 pandemic as consumers were no longer required to stay at home. The health crisis has also disrupted global supply chains for these goods. This dynamic drove prices up. Now they fall back to earth.
“You’ve seen some [price] “Returns in some categories that have been most impacted by the shift in consumer demand and most impacted by some of the supply chain issues we've seen over the course of the pandemic,” said Sarah House, senior economist at Wells Fargo Economics.
For example, since December 2022, average prices have decreased in these categories, among others: toys (by 4.5%), school books (4.9%), televisions (10.3%), men's suits, jackets and outerwear (6%). , sporting goods (2.5%), furniture and bedding (4.3%) and computer software and accessories (9.9%), according to the Consumer Price Index.
“We bought a lot of goods because we couldn't go out, travel or attend ballgames at the beginning of the pandemic,” said Mark Zandi, chief economist at Moody's Analytics. “There has been a shift from goods to things we couldn’t do when we were locked down.”
Prices for used cars and trucks also fell 1.3%, according to CPI data.
Prices for used and new cars were among the first to skyrocket as the U.S. economy largely reopened in early 2021 due to a shortage of semiconductor chips essential to manufacturing.
However, used car prices remain more than 30% higher than before the pandemic, meaning there is likely still plenty of room for a turnaround, said Andrew Hunter, deputy chief U.S. economist at Capital Economics.
Broadly speaking, a historically strong U.S. dollar relative to other global currencies has also helped contain commodity prices, Zandi said. This makes it cheaper for U.S. companies to import goods from overseas because the dollar can buy more.
According to Federal Reserve data from early January, the nominal broad U.S. dollar index is higher than at any time before the pandemic since at least 2006. The index measures the appreciation of the dollar relative to the currencies of the U.S.'s major trading partners, such as the Euro, the Canadian dollar, the British pound, the Mexican peso and the Japanese yen.
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Falling energy prices have also put downward pressure on goods prices due to lower transportation and energy-intensive manufacturing costs, economists said.
However, attacks by Houthi militias on merchant ships in the Red Sea – a key trade route – are causing a rise in freight costs, which could potentially lead to a reversal of goods deflation, Zandi said.
Lower energy prices also put downward pressure on food transportation to store shelves.
The prices for eggs and salad, for example, have also fallen significantly The reasons for these initial shocks include a historic outbreak of avian influenza in the United States, which is extremely deadly to birds such as laying hens, and an insect-borne virus that raged in the Salinas Valley growing region of California, which accounts for about half of the U.S. American salad production.
Elsewhere, deflationary dynamics sometimes only take place on paper.
For example, the US Bureau of Labor Statistics, which produces the CPI report, monitors quality improvements over time. Electronic devices such as televisions, cell phones and computers are getting better and better. Consumers are getting more for roughly the same amount of money, which is reflected in a price decline in the CPI data.
The situation is similar with health insurance, which is part of the “services side” of the US economy.
The BLS does not assess health insurance inflation based on consumer premiums. This is done indirectly by measuring insurers' profits. This is because the quality of insurance varies greatly from person to person. One person's premiums can buy high-quality coverage, while another person's premiums can only provide poor coverage.
These differences in quality make it difficult to accurately estimate changes in health insurance prices.
The 27.1% decline in health insurance prices last year reflects lower insurer profits in 2021 compared to 2020.
Such quality adjustments mean that consumers don't necessarily notice price reductions in the store – but only on paper.