This season’s hottest shopping trend: falling prices
American shoppers, burdened by more than two years of rapid inflation, are getting some welcome relief this holiday season: Prices on many products are falling.
Toys are almost 3 percent cheaper this Christmas than last year, government data shows. Sporting goods have fallen by almost 2 percent. Higher priced items also show price drops: washing machines, for example, cost 12 percent less than a year ago. And eggs, whose prices rose rapidly last winter and became a prime example of the country’s inflation problem, have fallen 22 percent in the past year.
Consumer prices are still rising overall, but not nearly as fast as a year ago. Most groceries still cost more than a year ago. That includes most services, such as restaurant meals, haircuts and trips to the dentist. And housing costs, the largest monthly expense for most Americans, continue to rise for both renters and homebuyers. Overall, the price of physical goods has remained stable over the past year, while the price of services has risen just over 5 percent.
Still, economists see the moderation in commodity prices as an important step to put the high inflation of the past two and a half years more clearly in the rearview mirror. They expect this to continue: Most forecasters say prices for physical products will continue to fall next year, especially prices for more sustainably manufactured goods, where recent declines have been the largest. That should help soften price increases overall.
“We are just at the beginning of that phase and we should continue to see downward pressure on prices in this category,” said Michelle Meyer, Mastercard’s chief economist.
For consumers, who are gloomy about the economy despite low unemployment, falling prices for many goods could provide a psychological boost. After the rapid inflation of recent years, a mere slowdown in price increases may not seem like much to celebrate. But seeing prices drop could be a different story — especially since some of the biggest recent declines have been in categories that consumers typically pay the most attention to, like gasoline. (The price of regular gas, which reached $5 per gallon nationally in June 2022, has fallen to an average of just over $3, according to AAA.)
“People are going to lock in on certain prices,” said Neale Mahoney, a Stanford University economist who recently left a role in the Biden administration. “We know that people will find certain things too heavy.”
The price of many goods has soared in 2021, fueled by a surge in consumer demand accompanied by pandemic relief checks and supply chain disruptions that limited the supply of many products, especially those from abroad .
Many economists initially expected a quick turnaround, but instead prices continued to rise. Supply chains took longer to return to normal than expected, and Russia’s invasion of Ukraine led to a spike in energy prices in 2022. At the same time, consumer demand for goods remained high and many companies took advantage of the opportunity to push down prices. and increase their profit margins.
Now, however, many of these powers are beginning to fade. Supply chains have largely returned to normal. Oil prices have fallen. Economic weakness in China and other countries has limited demand for many raw materials, which feeds into consumer prices.
Softer demand from US consumers could also play a role. The Federal Reserve has repeatedly raised interest rates since early last year in an effort to curb spending and keep inflation in check. Consumers have proven remarkably resilient so far, but retailers have reported in recent months that consumers have increasingly purchased cheaper items or waited for sales before purchasing; trends that could accelerate if the economy cools further next year.
“We think consumers will be looking for value, and that’s because they are very price sensitive,” Carlos E. Alberini, CEO of fashion retailer Guess, told investors last month. The company has “reexamined some of the pricing structure that we have across all brands,” he added.
Some toy manufacturers and retailers that sell toys have also said they expect sales this season to be less robust than in years past and have taken to advertising the affordability of their products.
At many companies, price cuts have taken the form of Black Friday sales and holiday promotions that are larger than in previous years for some product categories. At Signet Jewelers, the major diamond retailer, sales fell in the third quarter, and the company recently said it expected sales this holiday season to be lower than last year, partly due to “increased promotional activity.”
“It was a different holiday season,” Signet CEO Virginia C. Drosos told investors on a conference call this month. Instead of shopping early, customers are waiting to make their purchases and looking 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, says companies are trying to lower prices before their competitors do.
“If prices drop, there will be a race to lower prices even further, and you have to take credit for that,” he said. “We will see retailers really trying to regain consumer trust.”
Still, prices for most products remain well above pre-pandemic levels. A dozen eggs cost about 50 cents more than in February 2020. Used car prices, another prominent example of pandemic sticker shock, are down more than 10 percent from their peak early last year but are 37 percent higher than in February 2020.
Service prices are still rising faster than before the pandemic. Some economists say commodity prices will have to fall further before headline inflation returns to the Federal Reserve’s target of 2 percent per year.
“We need quite substantial deflation, and I wouldn’t call what we’re seeing ‘substantial,'” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution. “It’s not even substantial in a historical context.”
Durable goods prices fell for much of the two decades leading up to the pandemic. Long-term trends such as globalization and automation have generally driven down production costs. Fierce competition among retailers, especially with the rise of online shopping, meant that most of these savings were passed on to consumers.
In contrast, the prices of services rarely fall, partly because wages account for a much larger share of the costs of most services. During the decade before the pandemic, services prices gradually rose while goods prices remained flat or fell, resulting in an extended period of stable, moderate inflation.
Economists do not expect outright deflation, with prices for both goods and services falling. That’s a good thing: general price declines are generally considered economically dangerous if they persist.
There are a few reasons. For starters, deflation could theoretically cause consumers to postpone spending, creating a downward spiral. It may be unlikely that people will buy today what they expect to buy 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 someone saying, ‘I’m not going to buy that car today because in six months it’s going to be $600 cheaper,’” says economist Karen Dynan. at Harvard.
On the other hand, companies are unlikely to raise wages in a world where they cannot charge more. And if wages don’t rise – or even fall – it will become more difficult for households to keep up with fixed costs, such as mortgage interest payments.
But while broad-based price declines are a problem, most economists see the more limited declines now occurring as a sign that the economy is gradually moving past the pandemic’s disruptions.
“Supply chains have essentially normalized,” said Neil Dutta, head of economic research at Renaissance Macro. “Household demand behavior has actually normalized, the dollar is still quite strong. I would see no reason why commodity prices would increase.”