Will Prices Ever Go Down? For Some Things, They Already Have

Americans likely won’t see prices return to pre-pandemic levels. If it were widespread, falling prices — known as deflation — would be seen as a sign of a shrinking economy, which is characterized by less spending, fewer jobs and declining business investment.

But that doesn’t mean prices won’t come down at all. That’s already happening in some sectors. Costs related to travel — like airfare, hotels and car rentals — are down compared to a year ago. And prices for some goods have fallen as well, including for used cars and trucks.

In July, prices were lower year-over-year for about a third of the goods and services categories tracked by the consumer price index.

» MORE: Are gas prices going down?

But deflation is not the goal

Falling prices sound appealing but widespread deflation can negatively impact the economy.

• Consumer behavior: Don’t underestimate the power of consumer sentiment. When consumers expect prices to fall, they might hold off on making purchases, hoping to get a better deal later. 

• Business investment: Lower demand for goods and services means business slows down, putting the breaks on hiring, productivity and other business activities.

• Jobs and wages: High inflation made everything more expensive but it also boosted wages, especially in sectors that experienced labor shortages. Widespread deflation would have a similar effect — but a negative one. Slow business tends to lead to job cuts. And with more people looking for work, there’s no reason to raise pay.

All of this is part of what monetary policymakers call a “deflationary loop,” according to the Federal Reserve Bank of St. Louis. In this kind of loop, as consumers spend less, companies make less money and might respond by cutting wages or jobs. The loss of income means consumers have less money to spend, and on the loop goes.

Slower inflation could still mean cheaper stuff

So, rather than reverse inflation, monetary policymakers at the Federal Reserve want to slow it down, aiming for an annual inflation rate of 2%. An economic term for that is disinflation.

That’s been the story lately. Price increases have slowed way down since inflation peaked at nearly 9% two years ago. In fact, data released in August from the Bureau of Labor Statistics shows the annual inflation rate is finally below 3%, according to the consumer price index.

The Fed has worked to achieve disinflation by raising the federal funds rate. That works to throttle demand for goods and services by making it more expensive to borrow money. When the Fed finally cuts rates, as it’s expected to, beginning in September, it’ll effectively make some things cheaper for consumers. It’ll do that by lowering the cost of borrowing for things like cars and homes.