The American economy has a new twist: Deflation. Here’s what that means.

After struggling with high inflation for more than two years, American consumers are now seeing an economic trend that many may only dimly remember: falling prices — but only on certain types of products.

Deflation affects so-called durable goods, or products that are intended to last more than three years, Wall Street Journal reporter David Harrison told CBS News. Like Harrison noticed in his reporting, durable goods have fallen on an annualized basis for five consecutive months, falling 2.6% in October from their peak in September 2022.

These items are products such as used cars, furniture and appliances that saw large price increases during the pandemic. Used cars were especially one pain point for American households, where used cars are seeing their prices jump more than 50% in the first two years of the pandemic.

These recent pockets of deflation could help push overall U.S. inflation closer to 2%, the level the Federal Reserve is aiming for. The central bank has raised its benchmark interest rate 11 times since early 2022, part of its plan to make it more expensive for consumers and businesses to buy homes, cars and other goods bought with loans or credit.

As a result, inflation is slowing, reaching the point where most economists now predict the Federal Reserve will hold off on further rate hikes. The Fed’s next interest rate meeting will be on December 13.

“What do [durable goods deflation] Does it mean for the economy? Well, that’s a good sign,” Harrison said. “The fact that we have these prices coming down will offset the ongoing increases in services, and the idea is that will get us back to the 2% sweet spot.”

What is deflation?

That said, deflation is unlikely to be widespread. And if it does, it won’t bode well for the economy, Harrison added. Deflation is a fall in prices over time that usually occurs when demand dries up.

“This means that there is little demand for goods and services, and this usually happens in a time of recession,” he added.

Widespread deflation can be like kryptonite for the economy because consumers will typically wait to buy, banking that goods or services will simply become cheaper if they wait. One such deflationary spiral hit Japan in the 1990s, leading to a decade of economic stagnation dubbed Japan’s “Lost Decade”.

In the US, however, inflation is still higher than the Fed’s target of 2%. Prices likely rose 3.2% in November from a year ago, according to economists polled by FactSet. Inflation data for November will be published on 12 December.

Although inflation is quickly slowing, many Americans remain gloomy about the economy. About 6 in 10 workers say their income has limped last year’s price increases.

“Economists look at trends,” Harrison noted, but consumers “tend to look at absolute prices, and when you go to the grocery store, you still see that groceries are 20% more expensive than before the pandemic.”

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