American shoppers, burned by more than two years of rapid inflation, are getting some welcome relief this holiday season: Prices of many products are falling.
Toys cost almost 3% less this Christmas than last, Government data shows. Sports equipment fell nearly 2%. Even the most expensive items show price drops: washing machines, for example, cost 12% less than a year ago. And eggs, whose soaring prices last winter became a prime example of the country’s inflation problem, are down 22% from last year.
Consumer prices, overall, continue to rise, although not as rapidly as a year ago. Most groceries still cost more than they did a year ago. The same goes for most services, such as restaurant meals, haircuts and visits to the dentist. And real estate costs, the largest monthly expense for most Americans, are still rising for both renters and homebuyers. Overall, prices of physical goods have remained stable over the past year, while prices of services have increased by just over 5%.
However, economists see moderation in commodity prices as an important step to put the high inflation of the past two and a half years more firmly in the rearview mirror. They expect it to continue: Most forecasters say prices of physical products will continue to fall next year, particularly prices of longer-lived manufactured goods, where recent declines have been greatest. This should help dampen price increases overall.
“We are just at the beginning of that phase and should continue to see downward pricing pressure in this category,” said Michelle Meyer, chief economist at Mastercard.
For consumers, who have been tough on the economy despite low unemployment, falling prices on many goods could provide psychological relief. After the rapid inflation of recent years, a simple slowdown in price growth might not seem like much to celebrate. But seeing prices drop could be a different story, especially since some of the biggest recent drops have occurred in categories that consumers tend to pay more attention to, like gasoline. (According to AAA, the price of regular gas, which topped $5 a gallon nationwide in June 2022, has fallen to just over $3 on average.)
“People will put in certain prices,” said Neale Mahoney, an economist at Stanford University who recently left a role in the Biden administration. “We know that people will overweight certain things.”
The price of many goods has soared in 2021, fueled by a surge in demand from consumers loaded with pandemic relief checks and supply chain disruptions that have limited supplies of many products, especially those from ‘abroad.
Many economists initially expected a quick turnaround, but instead prices continued to rise. Supply chains have taken longer than expected to return to normal, and Russia’s invasion of Ukraine has led to a surge in energy prices in 2022. At the same time, consumer demand for goods consumers remained high and many companies took advantage of the opportunity to push prices up. increases and strengthens its profit margins.
Now, however, many of these forces are beginning to fade. Supply chains have largely returned to normal. Oil prices have collapsed. Economic weakness in China and other countries has dampened demand for many raw materials, impacting consumer prices.
Lower demand from American consumers could also play a role. The Federal Reserve has raised interest rates repeatedly since early last year in an effort to rein in spending and control inflation. Consumers have so far proven remarkably resilient, but retailers in recent months have reported that shoppers have increasingly switched to cheaper items or waited for sales before buying — trends that could accelerate if the economy cools further next year.
“We think the consumer will be looking 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 “revisited some of the pricing structure that we have for all brands,” he added.
Some toy manufacturers and retailers have also said they expect sales this season to be less robust than in years past and have gone to lengths to tout the affordability of their products.
At many companies, price cuts have taken the form of Black Friday sales and holiday promotions that are broader for some item categories than in years past. At Signet Jewelers, the large diamond retailer, sales fell in the third quarter, and the company recently said it expects sales to be lower this holiday season than last year, partly due to “high promotional activity.”
“It’s been a different holiday season,” Virginia C. Drosos, Signet’s chief executive, told investors on a conference call this month. Instead of shopping ahead of time, customers wait to make their 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 are trying to cut prices before their competitors.
“As prices fall, there will be a rush to lower them further, and take credit for it,” he said. “We’re going to see retailers really trying to win back consumer trust.”
However, prices for most products remain well above pre-pandemic levels. A dozen eggs cost about 50 cents more than they did in February 2020. Used car prices, another stark example of pandemic sticker shock, have fallen more than 10% from their peak early last year, but are 37% higher than those of February 2020.
Service prices continue to rise faster than before the pandemic. Some economists argue that commodity prices will have to fall further for overall inflation to return to the Federal Reserve’s target of 2% annually.
“We need some 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 historical context.”
In fact, durable goods prices fell for much of the two decades before the pandemic. Long-term trends such as globalization and automation have tended to reduce production costs. Intense competition among retailers, especially with the rise of online shopping, has meant that savings have mostly been passed on to consumers.
Service prices, on the other hand, rarely fall, in part because wages represent a much larger share of the cost of most services. In the decade before the pandemic, the prices of services gradually increased, while those of goods remained stable or fell, resulting in a long period of stable and moderate inflation.
Economists do not expect to see full-blown deflation, in which prices fall for both goods and services. That’s a good thing: Overall price declines are generally considered economically dangerous if they last.
There are a few reasons. For starters, in theory, deflation could cause consumers to curb spending, triggering a downward spiral. It may be unlikely that people will buy today what they expect will 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 in six months it will be $600 cheaper,’” said Karen Dynan, an economist at Harvard .
On the other hand, companies are unlikely to raise wages in a world where they can’t ask for more. And if wages don’t rise – or even fall – it will be harder for families to keep up with fixed bills, such as mortgage interest payments.
But while across-the-board price drops are a problem, most economists see the smaller declines occurring now as a sign that the economy is gradually overcoming the upheavals of the pandemic.
“Supply chains have basically normalized,” said Neil Dutta, head of economic research at Renaissance Macro. “Household demand behavior has essentially normalized, the dollar is still quite strong. I wouldn’t see a reason why commodity prices would go up.”