The U.S. economy has a new twist: Deflation. Here's what that means.
After grappling with high inflation for more than two years, American consumers are now seeing an economic trend that many might only dimly remember: falling prices — but only on certain types of products.
Deflation is impacting so-called durable goods, or products that are meant to last more than three years, Wall Street Journal reporter David Harrison told CBS News. As Harrison noted in his reporting, durable goods have dropped on a year-over-year basis for five straight months and dropped 2.6% in October from their September 2022 peak.
These items are products such as used cars, furniture and appliances, which saw big run-ups in prices during the pandemic. Used cars in particular were a pain point for U.S. households, with pre-owned cars seeing their prices jump more than 50% in the first two years of the pandemic.
These recent pockets of deflation could help push the overall U.S. inflation rate closer to 2%, which is the level the Federal Reserve is targeting. The central bank has raised its benchmark rate 11 times since early 2022, part of its plan to make it more expensive for consumers and businesses to buy homes, autos and other items that are purchased with loans or credit.
As a result, inflation is easing, reaching the point where most economists are now predicting the Federal Reserve will hold off on additional rate hikes. The Fed's next interest-rate meeting will be on December 13.
"What does [durable goods deflation] mean for the economy? Well, it's a good sign," Harrison said. "The fact that we have these prices falling will offset the ongoing increases in services, and the idea is that will get us back to the 2% sweet spot."
What is deflation?
That being said, it's unlikely that deflation will become widespread. And if it does, that won't be good sign for the economy, Harrison added. Deflation is a decrease in prices over time, which is usually caused when demand dries up.
"That means there's little demand for goods and services, and that usually happens in a time of recession," he added.
Widespread deflation can be like kryptonite for the economy because consumers typically will then hold off on purchases, banking that goods or services will simply get cheaper if they wait. Such a deflationary spiral hit Japan in the 1990s, leading to a decade of economic stagnation called Japan's "lost decade."
In the U.S., however, inflation is still higher than the Fed's 2% goal. Prices likely rose 3.2% in November from a year ago, according to economists polled by FactSet. Inflation data for November will be released on December 12.
Even though inflation is rapidly cooling, many Americans remain gloomy about the economy. About 6 in 10 workers say their incomes have lagged the price increases of the last year.
"Economists look at trends," Harrison noted, but consumers "tend to look at absolute prices, and when you go to the grocery store you still see groceries are 20% more expensive than before the pandemic."
