Consumers might wish for prices to drop, but here’s why deflation is not a good thing
Consumers might wish for prices to drop, but here’s why deflation is not a good thing
Prices rose again last month, slightly more than they did in January, according to the latest consumer price index out Tuesday from the Bureau of Labor Statistics. Across the board, prices are now 3.2% higher than they were a year ago. Core inflation — all prices minus volatile food and energy — rose even more, at 3.8%.
It’s more proof that getting inflation down the rest of the way to the Federal Reserve’s 2% target is going to be bumpy. And remember, the goal is less inflation. Not no inflation.
Once prices go up, it’s unusual for them to drop. That said, if you dig deeper into the BLS data — which of course we at Marketplace like to do — you’ll see that some prices have actually fallen in the last year.
Most of us would love to see prices go back down. But Victoria Fernandez at Crossmark Global Investments said that’s wishful thinking.
“Prices rarely actually come down once they go up,” Fernandez said.
And she said deflation — when lots of prices start to fall — is not a good thing.
“Most of the time, if you have deflation, it’s because your economy is struggling tremendously,” she said.
Think about it this way: “If we think something will be cheaper tomorrow, we don’t buy it today,” said Carl Tannenbaum, chief economist at Northern Trust. Because consumer spending accounts for a huge chunk of the U.S. economy — about 70% — if we stop spending, the economy slows down, he said.
“So while we often root for lower prices on certain categories, I don’t think that is a general outcome that we would find pleasing,” he said.
A more pleasing outcome is if prices rise slowly and wages rise too. But Tannenbaum said if some prices fall here and there, that’s not bad.
A bunch of items were cheaper in February than they were a year ago, including appliances, electronics and furniture.
“Most of the examples where we’re seeing falling prices, if we go back a little further in time, we will see outsized price increases,” Tannenbaum said.
Those increases were mostly because of the pandemic and all the supply chain issues, said Kevin Jacques at Baldwin Wallace University.
Remember when there weren’t enough chips to make all the computers and cars we wanted to buy? And couches were backordered for months?
“Those kinds of prices that had risen so much because of the supply side constraints, they’re now largely resolved, and the prices can come back to more what we would think of as a normal price,” Jacques said.
This is not just about supply, though. Demand is also a big part of the story.
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