Deflation is the antidote to inflation. Here is the breakdown from September 2023
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Consumers have been hearing a lot about inflation in the U.S. economy since the start of 2021, and rightly so. At their peak during the pandemic, consumer prices rose faster than ever before 40 years.
But the dynamic seems to have shifted.
Inflation has gradually declined, meaning prices are still rising but at a slower rate, also known as disinflation. It is said that some prices actually fell last year Consumer Price Index.
Deflation is the opposite of inflation: it means that consumers experience falling prices in certain categories.
Why some prices are falling
Economists say most of this deflationary dynamic is taking place on the “goods side” of the U.S. economy, that is, on the material items Americans buy. Goods make up about a quarter of the consumer price index.
There are mutliple reasons for this.
The dynamic is also in some ways a return to the pre-pandemic norm, Zandi said.
Goods deflation was typical before the Covid-19 pandemic, he said. But the health crisis disrupted global supply chains and caused shortages that led to sharp price increases. When Russia invaded Ukraine, energy costs rose, driving up transportation and other distribution costs.
Now supply chain disruptions are largely in the rearview mirror, he said. Energy costs have fallen.
In the long term, consumers also generally see savings as manufacturers shift production of goods to lower-cost areas, Zandi said.
How measurement errors affect prices
Some of the declines are due in part to measurement error.
For example, the US Bureau of Labor Statistics, which produces the CPI report, Controls for 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 measure changes in health insurance prices.
Such quality adjustments mean that consumers don’t necessarily notice price reductions in the store – but only on paper.
