Good Deflation

How much further can goods prices fall?

One of the pleasant surprises of 2023 was how quickly inflation decelerated in major economies. Most of the good news came from falling goods prices.

Core goods (which exclude the food and energy categories) account for up to 30% of consumer price indices in Europe and the United States. In the U.S, after peaking at a year over year increase of 12.5% in 2022, prices of core goods are now declining. Falling costs of consumer appliances, home furnishings and cars have led the way.

In the eurozone, non-energy industrial goods inflation has decelerated from a peak of 6.8% year over year in February 2023 to 2.0% in January 2024. Similar disinflationary trends have been observed in the U.K., with core goods prices moderating from a peak of 8% year over year in April 2022 to 2.7% last month.

The pandemic created a series of forces that contributed to a surge in goods prices, with supply chain problems most prominent. Though supply chain pressures heated up a bit recently amid rising shipping disruptions in the Red Sea, supply constraints have generally continued to ease over the past year (see below chart). As we highlighted here, shipping disruptions alone won’t be inflationary.

As economies reopened, consumers shifted back to services, exerting downward pressure on goods prices. Inventories in many sectors are back in line with pre-pandemic levels. Lower pricing power amid weakening demand is forcing firms to accept thinner margins to retain market share.