Prices of some products are actually down during the holiday season

Prices of some products are actually down during the holiday season

American shoppers, exhausted 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% cheaper this Christmas than last year, according to government data. Sports equipment is down almost 2 percent. The most expensive items also show a price drop: for example, washing machines cost 12% less than a year ago. And eggs, whose skyrocketing prices last winter became a prime example of the country’s inflation problem, are down 22 percent over the past year.

Consumer prices, overall, continue to rise, but not as quickly as a year ago. Most groceries still cost more than they did a year ago. The same goes for most services, such as restaurant meals, haircuts, and dentist visits. 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 increased by just over 5 percent.

Economists nevertheless see the moderation of goods prices as an important step towards better accounting for the high inflation of the past two and a half years. They expect this trend to continue: Most forecasters believe that prices of physical products will continue to fall next year, particularly those of longer-lived manufactured goods, where recent declines have been the most important. This should help to mitigate price increases overall.

“We are only at the beginning of this phase and we should continue to see downward pricing pressure in this category,” said Michelle Meyer, Mastercard’s chief economist.

For consumers, who are pessimistic about the economy despite low unemployment, falling prices for many goods could provide a psychological boost. After the rapid inflation of recent years, a simple slowdown in price increases might not seem like much to celebrate. But seeing prices fall could be a different story, particularly because some of the biggest recent declines have been in categories that consumers tend to pay the most attention to, like gasoline. (The price of regular gasoline, which topped $5 a gallon nationally in June 2022, has fallen to just over $3 on average, according to AAA.)

“People are going to determine certain prices,” said Neale Mahoney, a Stanford University economist who recently left his post in the Biden administration. “We know people are going to overcharge for certain things.”

Prices for many products have soared in 2021, fueled by strong demand from consumers flocked to by pandemic relief checks and by supply chain disruptions that have limited the supply of many products, in especially those coming from abroad.

Many economists initially expected a rapid reversal, but prices continued to rise. Supply chains have taken longer than expected to return to normal, and Russia’s invasion of Ukraine has led to a surge 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 up prices. increases and increases their profit margins.

But today, many of these forces are beginning to fade. Supply chains have largely returned to normal. Oil prices have fallen. Economic weakness in China and other countries has dampened demand for many raw materials, impacting consumer prices.

Weaker demand from U.S. consumers could also play a role. The Federal Reserve has raised interest rates several times since early last year in an effort to rein in spending and control inflation. Consumers have so far proven remarkably resilient, but retailers have reported in recent months that shoppers are increasingly turning to cheaper items or waiting for sales before buying – trends that could accelerate if the economy cools further next year.

“We think the consumer is going to look for value, and that’s because they’re very sensitive to price,” Carlos E. Alberini, chief executive of Guess, the fashion retailer, told investors last month. The company has “revisited some of the pricing structure that we have across all brands,” he added.

Some toy makers and retailers that sell toys also said they expected sales this season to be less robust than in previous years and have prioritized advertising the affordability of their products.

At many companies, price cuts have taken the form of Black Friday sales and larger holiday promotions for certain categories of items than in previous years. At Signet Jewelers, the major diamond retailer, sales fell in the third quarter, and the company recently said it expected sales to be lower this holiday season than last year, in partly due to “high promotional activity”.

“The holiday season has been different,” Virginia C. Drosos, Signet’s chief executive, told investors on a conference call this month. Instead of shopping early, customers wait to make their purchases and look 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, said companies are trying to reduce prices before their competitors.

“As prices come down, there will be a race to bring prices down further and get credit for that,” he said. “We’re going to see retailers really trying to regain consumer trust. »

Still, prices for most products remain well above what they were before the pandemic. A dozen eggs cost about 50 cents more than in February 2020. Used car prices, another stark example of the pandemic shock, have fallen more than 10 percent from their peak earlier in the year. last year, but are 37 percent higher than their February 2020 level.

Prices for services continue to rise faster than before the pandemic. Some economists say goods prices will have to fall further for overall inflation to return to the Federal Reserve’s 2 percent per year target.

“We need pretty significant deflation, and I wouldn’t call what we’re seeing ‘substantial,’” said Wendy Edelberg, director of the Hamilton Project, an economic policy division of the Brookings Institution. “It’s not even substantial in a historical context.”

Indeed, prices of durable goods fell for much of the two decades before the pandemic. Long-term trends such as globalization and automation have tended to drive down manufacturing costs. Intense competition between retailers, particularly with the rise of online shopping, means that these savings have mostly been passed on to consumers.

In contrast, prices for services rarely fall, in part because wages represent a much larger share of the cost of most services. In the decade before the pandemic, prices of services gradually increased while prices of goods remained stable or fell, leading to a long period of stable and moderate inflation.

Economists do not expect outright deflation, in which prices of goods and services fall. This is a good thing: overall price declines are generally considered economically dangerous, if they last.

There are a few reasons. For starters, in theory, deflation could cause consumers not to spend, thereby triggering a downward spiral. People are unlikely to buy today what they expect to be cheaper tomorrow. Once deflation sets in, it can be difficult to escape: Japan has been stuck in a deflationary pattern since the late 1990s.

“When economic demand is weak, the last thing you want is someone to say, ‘I’m not going to buy this car today because it’s going to cost $600 less in six months.'” said Karen Dynan, an economist. 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 be harder for households to keep up with fixed bills, like mortgage interest.

But while widespread falling prices are a problem, most economists view the more limited declines occurring now as a sign that the economy is gradually overcoming the disruptions of the pandemic.

“Supply chains have fundamentally normalized,” said Neil Dutta, head of economic research at Renaissance Macro. “Household demand behavior has basically normalized, the dollar is still quite strong. I don’t see why the prices of goods would increase.”