Not getting worse
The U.S. economy is shifting toward disinflation. Here's why that's 'most welcome.'
When Federal Reserve chair Jerome Powell announced a relatively small 25-basis-point hike in benchmark U.S. interest rates last week, he really talked up the idea of disinflation.
Inflation is still much higher than the Fed's 2 percent target — it was 6.5 percent year-over-year in December, from a peak of 9.1 percent in June — but it is dropping, and that disinflation is "most welcome," Powell said. In all, Reuters reports, he used the word disinflation 15 times in his 45-minute news conference on Wednesday.
"That disinflationary process that you now see underway is really at an early stage," Powell said. "You see inflation now coming down because supply chains have been fixed, demand is shifting back to services, and shortages have been abated." He added that odds are up for a soft landing, and "it is a good thing that the disinflation that we have seen so far has not come at the expense of a weaker labor market."
Disinflation, or a drop in the rate of inflation, is generally good for consumers and, ultimately, the economy, especially when inflation is high. It is different than deflation, or a decline in overall prices, which is considered problematic for the economy. "Falling prices tend to sap economic strength, as households for instance put off purchases knowing they could get a better deal if they wait, which eats at spending and can in turn deepen price declines further," Reuters reports. Consumer spending makes up more than 70 percent of U.S. GDP.
The Federal Reserve has helped drive disinflation by raising interest rates, and thus the cost of borrowing, curbing spending. But it isn't doing this alone. Grocery chains and other large retailers are leaning on suppliers to cut wholesale prices, trying to slow or stop raising retail prices as shipping and material costs fall — and price-sensitive customers start shopping at discount stores, The Washington Post reports.
"During periods of slowing inflation, prices of commodity-linked items such as meat, produce, and dairy have historically decreased, while packaged foods haven't tended to change much," The Wall Street Journal reports, citing supermarket operators said. Large retailers typically have enough leverage to force pricing concessions from food packagers, too. "For now, shoppers who have paid for pricier goods — from kitchen appliances to laundry detergent to grocery staples — are unlikely to get much relief," the Post reports. "Rather, the best-case scenario is that inflation will not get any worse."