Inflation has been slowing. When will prices go down?

By Hannah Erin Lang

The consumer price index has hovered at lower levels over the past few months. Here's which items actually could get cheaper.

It's a question that may have crossed your mind, perhaps after shopping for groceries or reading the headlines: When are things going to start getting cheaper?

There's a somewhat complicated - and perhaps depressing - answer.

The Consumer Price Index, which measures inflation, ticked up to 3.2% in February. The reading was stronger than expected - but the pace of price increases has still fallen significantly since peaking in summer 2022.

But the reality is that even as the inflation rate falls, it's unlikely that most prices will decrease alongside it, though some individual items might cost less.

And as much as it might not feel like it over the last few years, ever-rising prices can actually be a good thing in the broader economic picture. The alternative could spell economic disaster.

Here's a breakdown of which items may start to cost less, why prices still feel so high and why the Federal Reserve aims for just a little bit of inflation in the economy, as opposed to none at all.

When will prices come back down to "normal" levels?

In June 2022, the inflation rate peaked at about 9% as the cost of everything from a gallon of gas to a gallon of milk shot up rapidly.

By this January, the inflation rate - or, the amount that prices have risen year-over-year - had fallen to 3.1%.

Many consumers may expect a lower inflation rate to be reflected in the form of lower prices, said Connel Fullenkamp, an economist at Duke University. But that's not how inflation works.

A decreasing inflation rate - also known as disinflation - doesn't mean that prices are coming down, Fullenkamp noted. They're still rising, just at a slower rate.

"I think that's a very common misconception people have," he said. "And I think that's a reason why a lot of people are still very unhappy about the economy."

The Federal Reserve, the U.S. central bank, is tasked with controlling inflation. But its policy makers are only looking to moderate the pace of price increases, not eliminate them entirely.

That's because, from an economist's point of view, a little bit of inflation isn't a bad thing.

"In good economic times, we always have some inflation," said Michael Walden, an economist and professor emeritus at North Carolina State University. "As long as people's incomes rise at the same pace, it doesn't affect the standard of living."

Will some prices fall?

In some cases, the price of specific items may drop as inflation throughout the economy moderates.

Those items tend to have seen their prices pushed higher due to constraints in supply rather than increases in demand, said Kyle Anderson, an economics professor at Indiana University's Kelley School of Business.

Eggs are one such example: Prices shot up last year after an avian-flu outbreak wiped out farmers' flocks, peaking at an average cost of $4.82 for a dozen. But by this January, they'd fallen back to $2.52 a dozen.

Prices for new and used vehicles also shot up after the pandemic, Anderson noted, but have decreased over the last couple of years as supply-chain snags eased.

On the other hand, price increases for services like hotel stays or airfare are largely due to increased demand - and are likely to stick around.

"It's more likely that you'll see prices decrease for goods that might be susceptible to shortages," Anderson said. "The costs of services are largely dependent on wages, which aren't likely to fall."

Why is the Federal Reserve's goal an inflation rate of 2%?

Deflation, a broad decrease in prices, can actually be damaging for the economy.

When prices keep falling, consumers and businesses hold on to their cash, hoping to save more by deferring their purchases or investments. But when that spending slows, economic growth stalls, company profits shrink and unemployment rises.

"It starts this terrible cycle," Fullenkamp said. "That's why deflation is so deadly."

The Fed aims for a 2% inflation rate in the U.S. economy in part to steer clear of deflationary territory, and in part because a little bit of inflation is consistent with economic growth, Anderson said.

"Some inflation is a natural part of a growing economy," according to Anderson. "As we earn more, as we work harder, as there's innovation in technology, the demand for goods [and services] increases."

Why do prices still feel so high?

Even though inflation has moderated, it's taken a long time for Americans to adjust to higher price tags - even though wages across the economy have outpaced inflation for several months now.

"If we go to places like the grocery store or the gas station, you get really familiar with the things you buy," Fullenkamp said.

Anderson noted that it might also be because only a small number of adult Americans are old enough to remember the last time the country had to wrestle with aggressive price increases, a period that began in the 1970s.

In the upcoming presidential election, clarifying the difference between disinflation and deflation could become even more important, Walden said. Addressing the impact of price increases could be key as the Biden administration tries to convince voters that the incumbent president has a positive record on the economy.

"I think it does have important political consequences," Fullenkamp added. "It's a pretty well-established fact that people vote with their pocketbooks."

We want to hear from readers about how increasing costs and a changing economy are affecting your life. If you'd like to share your experience, write to readerstories@marketwatch.com. Please include your name and the best way to reach you. A reporter may be in touch.

-Hannah Erin Lang

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03-13-24 1159ET

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