Welcome to Extreme Investor Network, where we break down the latest financial news and trends in a way that adds value to your investment strategy. Today, we’re diving into the recent dip in inflation below 3% in July 2024, marking the first time it has dropped below that level in over three years.
While certain sectors of the U.S. economy are experiencing disinflation (prices rising at a slower rate), others are facing outright deflation, where prices are actually decreasing. This deflation is primarily seen in physical goods, as well as categories like airline fares, gasoline, and select food items based on the consumer price index.
According to Joe Seydl, senior markets economist at J.P. Morgan Private Bank, these pockets of deflation can be considered “micro” in nature.
Understanding the Shift in Goods Prices
Core goods, which exclude food and energy-related commodities, have seen an average decline of around 2% since July 2023, with a further 0.3% drop from June to July 2024 according to CPI data. This shift can be attributed to the surge in demand for physical goods at the onset of the Covid-19 pandemic when supply chains were disrupted, causing prices to soar.
However, the current landscape has changed, leading to a decline in prices for furniture, bedding, dishes, flatware, toys, apparel, electronics, and vehicles over the past year. Factors such as decreased demand for home improvement projects and resolved supply chain issues have contributed to this trend.
The reduction in prices for new and used vehicles, as well as car and truck rentals, is an example of how market dynamics can influence pricing. Experts from Wells Fargo Economics noted that these price adjustments are linked to improved inventory levels and higher financing costs.
The Role of the Federal Reserve and Global Factors
Higher financing costs in response to inflation have prompted the Federal Reserve to consider reducing interest rates at their upcoming policy meeting in September. Additionally, the strength of the U.S. dollar compared to other global currencies has played a role in curbing prices for goods by making imports more affordable for U.S. companies.
Long-term global forces such as increased imports of lower-priced goods from China have also impacted pricing dynamics, fostering a competitive environment for consumer goods.
Examining Deflation in Specific Sectors
Looking at specific sectors, we see deflationary trends in areas like airfare, food, and electronics. Airline fares have decreased about 3% over the past year, with factors like reduced jet fuel prices and increased seat availability contributing to this decline.
Grocery prices have also fallen for items such as cereal, rice, bread, and various food products, driven by unique supply-and-demand dynamics for each category. Additionally, price promotions at grocery stores and recent announcements of price cuts by major retailers have influenced consumer pricing.
Finally, while certain categories like electronics show a decline in prices due to quality improvements over time, consumers are actually getting more value for their money in terms of product features and technology upgrades.
At Extreme Investor Network, we strive to provide you with expert analysis and insights to help guide your investment decisions. Stay tuned for more updates on the ever-evolving financial landscape.