Today the BEA released inflation figures for December, and there was both good news and bad news:
Headline PCE inflation dropped nearly to zero in December. That's the good news. However, core PCE inflation ticked up a bit to 3.5%. That's not terrible, but it does indicate that core inflation is dropping at a pretty moderate rate.
Food inflation dropped to 2.9% in December, continuing its steady drop since July:
Overall, this is a good report. All we have to do now is get inflation in services down and we'll be in good shape.
My weekly grocery bills are still eye-popping. I wonder how long it will take for the lower inflation to work its way through the supply chain. I presume the food companies and grocery chains will try to see how long they can ride the higher price wave, though.
Unfortunately, lower inflation does NOT mean lower prices. It means prices going up slower than before.
Prices coming down is frequently a bad sign for the economy.
Food prices go up and down all the time. If there's a shortage they go up, but they come back down immediately when there is more supply. Most people can still find more than one grocery company to shop at so there is competition, although that may not last much longer.
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Serious question (although I think I know the answer): Does this recent moderation of inflation mean that prices on critical consumer goods (food, gas, housing...) will start to come down and eventually revert to their pre-inflation level? Or does it mean that the new higher prices that have made my life (and those of billions of others) harder are now locked in and subject to new, "less onerous" inflation levels?
Everyone's favorite answer: it depends!
Generally, I doubt the overall price level will decrease much, if at all. Actual deflation is the sign of a very sick economy, and monetary stimulus would be swift and forceful if we got to that point.
Certain items will certainly get cheaper again. Eggs, for example, are incredibly expensive right now, but I expect that the price of eggs will come back down once we get past the current avian flu outbreak.
Will they come all the way back down to their 2019 price? Probably not. But just like gas prices came back down after this summer's highs, food prices seem like one area where we could see *actual price decreases* instead of merely having to settle for *slower price increases*.
But overall, do not hold your breath for deflation. Life is more expensive now. 🙁
The price level will not go down much - look at the CPI at FRED - it rarely declines. You need to join a union and go on strike if necessary to get higher wages (wages go up over time also).
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PCE services - food - energy- housing = wages.
Its fascinating to watch the Fed and the general media frame this battle against American wage increases. We've been conditioned to accept the framework that wage increases are dangerous for the economy and bad for workers.
We complain about the lack of wage growth over time and cheer on measures explicitly designed to reduce wages.