Some Perspective on Falling (Yes, Falling) Prices

Don’t look now, but some of your favorite household goods and eats are cheaper entering the holiday season. Prices for bacon, televisions and outerwear are all down from October 2023. Yet while selected prices may be down year over year, many of these categories remain well above prepandemic levels. This largely reflects what many consumers see every day … a confirmation inflation was painful … and today’s price levels still seemingly sting. However, we think there is important investing perspective unlocked by taking a little closer look at prices’ movements and levels.

Inflation has dominated headlines over the past several years—understandably. Households paid higher prices for a litany of everyday items, from gasoline to eggs. While economists note inflation is easing, consumer prices overall remain elevated. What gives?

As we wrote last year, the distinction is semantic. Literally. Inflation is a rate of change. We have had disinflation since US CPI peaked in June 2022, which is a technical term for a slower rate of rising prices. Prices across the economy are still rising—just not as quickly as they were in 2021 and 2022. Not even close! The level bakes in all the cumulative inflation.

But the inflation rate is also a composite of price movements in hundreds of goods and services. At any time, some individual prices will rise and some fall, at varying rates, often due to supply and demand trends. So it isn’t a surprise prices for many high-profile items have fallen over the past 12 months … especially as overall inflation cools toward normal.

CNBC runs a monthly deflation breakdown (with a nifty graphic), and October’s notables include gasoline (-12.4% y/y), telephone hardware, (-9.6%), and, yes, turkey (-3.9%).^[i] The major driver behind these falling prices: the US economy’s return to normal after pandemic-driven disruptions skewed economic activity, from roiling supply chains to altering typical spending patterns.

That said, while some prices may be down from a year or two ago, the large majority remain above their prepandemic levels. Exhibits 1 and 2 highlight some high-profile goods prices that soared during pandemic times—and haven’t returned to prior levels.

Exhibit 1: While Some Prices Are Falling Over the Past Couple Years…

Source: FactSet, as of 11/18/2024. CPI – All, CPI – Gasoline (All Types), CPI – Eggs, CPI – Used Cars and Trucks, CPI – Beef and Veal, indexed to 100 on 12/31/2021, December 2021 – October 2024.

Exhibit 2: … They Remain Well Above Prepandemic Levels

Source: FactSet, as of 11/18/2024. CPI – All, CPI – Gasoline (All Types), CPI – Eggs, CPI – Used Cars and Trucks, CPI – Beef and Veal, indexed to 100 on 12/31/2018, December 2018 – October 2024.

This isn’t to say no category will return to 2019 price levels ever again. Heck, the BLS’s data show some categories, like men’s and women’s formal wear, are already below those points. As that example illustrates, sector-specific supply and demand dynamics play a big role. Beyond that work-from-home-influenced trend, take oil and metal prices. They tend to be less connected to the macroeconomic backdrop and more influenced by commodity “supercycles”—so prices may vacillate much more sharply depending on whether there is a supply glut and/or gangbusters demand.    

But a few examples of falling prices notwithstanding, overall, prepandemic prices aren’t coming back—no matter which party or politician is in office. Many seem to harbor hope the incoming Trump administration will “fix” the high prices. We caution against that thinking, and our reasoning has nothing to do with political preferences—as always, MarketMinder is nonpartisan and prefers no political party over another.

Getting overall prices back to prepandemic levels would take deep deflation—specifically, a cumulative -16.9% price decline to return to December 2020’s price levels (which preceded the 2021 – 2022 price surge).^[ii] Sound good? Prices’ falling economywide is often a side effect of major economic issues (e.g., a big recession and a huge credit crunch). A nearly -17% deflation would be massive—arguably witnessed only in the early 1920s and 1929 – 1933 contractions. 2008’s global financial crisis saw some deflation, but nothing remotely close to this degree.

Today, the drivers behind the recent bout of inflation have eased. Remember, inflation is a monetary phenomenon—the case of too much money chasing too few goods and services. The supply shock that knocked goods and services has mostly passed at this point. After money supply spiked in 2020 when central bankers pumped in new money to buoy demand, the US has worked a lot of that excess out. The upshot: Inflation, like other economic measures, is returning to normal.

The way Western economies have historically overcome inflation? Wage growth. It takes time, but rising wages eventually restore households’ purchasing power. This is underway today, albeit at a lag. Now, this doesn’t mean everyone’s financial situation is improving at the same rate, especially since individual living costs and income streams vary. But overall, inflation’s bite isn’t as severe as it was a couple years ago—a reality investors benefit from recognizing.