Inflation: The New 'Recession'
Ever since the Great Recession ended back in July 2009, economists began to play down the dreaded R-word and got us to fear another financial buzzword that’s just as ominous: inflation.
Economists will often cite from the same handful of factors that could sharply drive prices up and cause rapid inflation to take root. Some note the rising cost of commodities like oil – something that is particularly true now with the protests in the Middle East - could drive up the prices on many consumer goods. Others speculate that the government’s efforts to stimulate the economy may have the unintended consequence of ratcheting up costs. Still others fear the possibility of the declining value of the dollar due to the unstable economy, which could make U.S. imports from countries like China more expensive.
If inflation takes hold as a result of any or all of these factors, it not only could make it all the more expensive to purchase a home or car, but it also could undermine one’s long-term savings plans and even the value of Social Security, which does not offer cost of living increases at the moment.
Yet, all the panic about inflation has obscured the fact that many products in the U.S. are actually getting cheaper, at least for now.
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Consumer Products That Are Cheaper Now Than in 2010
Prices on consumer products increased by 0.4% in January of this year and by 1.6% since the beginning of 2010, according to the most recent data from the Bureau of Labor Statistics, which tracks the changing cost of goods and services as part of its monthly Consumer Price Index (CPI).
According to the CPI data, this increase was largely driven by the rising cost of fuel and most food items, but even during this time period, dozens of products declined in price.
"Gasoline and food prices are definitely increasing, with fuel prices increasing significantly more … but there are certain industries that admittedly have great difficulty in raising prices,” said Bernard Baumohl, chief global economist at the Economic Outlook Group and author of The Secrets of Economic Indicators.
The reasons for this can vary, according to Baumohl. For some industries, the recession is still negatively impacting consumer demand for certain products, while prices in other industries may be down due to more longstanding factors beyond the economic downturn.
MainStreet has analyzed the most recent CPI data to find some of the consumer products that experienced the steepest price decline from 2010 through the beginning of this year. We spoke with experts to find out the reasons behind this decline and how long the low prices may last.
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Hotels and Motels
Vacations may never be dirt cheap, but they have certainly gotten cheaper. The average price of hotels and motels dropped by 7.7% between July and January, as the hospitality industry struggles to attract U.S. consumers still weary of splurging on trips and lodging.
“The economy may be getting stronger, but they are not at the forefront of the recovery,” Baumohl says of the hospitality industry. As a result, hotels and motels generally do not have as much pricing power as healthier industries and often need to lowball themselves to attract customers.
Airlines, on the other hand, have already begun to raise their airfares in recent months. But then, even as Americans begin to fly more, surveys have shown they are more likely to stay with friends than in years past, so perhaps the golden age of hotel prices will last a little while longer.
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The price of household items like furniture, linens and appliances has dropped sharply during the past year. The cost of living room, kitchen and dining room furniture declined by 6.5% in the first half of 2010 and by 0.9% between July and January of this year. Linens experienced an even steeper decline of 11.3% in the first half of 2010 and 5.1% in the following six months. And certain appliances, for example laundry equipment, have actually seen price declines accelerate, from a 4.2% drop in the first half of 2010 to 8.4% in the second half.
“The demand for housing supplies is very much related to the still depressed picture of home sales,” Baumohl said. “So I don’t think this will contribute to inflation until we see a significant pickup in new and existing home sales.”
If that’s true, prices could stay low for furniture and other items for months to come.
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Tablet computers and smartphones may seem expensive, but the truth is that electronics on the whole always tend to get cheaper from year to year and continue to do so despite rising prices elsewhere in the marketplace.
The cost of personal computers dropped by 9.2% between July and January, while the price of hardware and IT services decreased by 5% during the same period. Audio equipment like stereos and speakers also dropped by 5% during this time, and the price of televisions declined by the most of all of these, dropping by 15.8% during this time, after having gone down by nearly 20% during the previous six months.
That’s not to say some gadgets don’t get more expensive, but on the whole, electronics only get cheaper.
“We’ve certainly seen a long-term decrease in technology items, ranging from computers to televisions,” said Steve Reed, an economist at the Bureau of Labor Statistics. “It’s the classic pattern of new technology causing old technology prices to decline.”
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Women's Hosiery and Men's Clothing
Many different apparel items have seen prices decline in recent months as well. Prices on women’s hosiery dropped by 2.7% in the second half of 2010 while prices on men’s clothing in general declined by 1.1%, and infant apparel declined the most of all, with prices going down by 9.3% during this time.
Reed notes that apparel prices haven’t suffered inflation in decades and according to Baumohl, it’s unlikely they will anytime soon, even as other items get more expensive.
“So many of these products are manufactured outside the U.S., particularly in China, which has decided to keep its currency cheap compared to U.S. currency,” Baumohl said. “That has allowed U.S. wholesalers to pass on the lower cost to consumers.”
Add to that a lower-than-usual consumer demand for going shopping, and prices could stay low for the foreseeable future, as retailers struggle to attract customers.
“Rising energy prices and lower wages are squeezing households and giving consumers less discretionary income to spend on things like apparel.”
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Utility (Piped) Gas Services
Oil prices may be skyrocketing at the moment, but the price of natural gas is actually going down. Homes and businesses that have piped gas services saw prices decrease by an average of 10.5% between July and January of this year. By comparison, electricity prices went up by 1.2% during that period.
“Natural gas prices are related to utility regulation and natural gas supplies,” Reed says. But just because prices are low now doesn’t mean consumer should all switch to natural gas. “Natural gas is always volatile, it’s all over the place.”
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Food in general may be getting more expensive, but some meats like chicken are actually getting cheaper. The cost of chicken dropped by 2.4% between July and January, while the prices of meats like pork and beef remained relatively stagnant during this period compared to price increases in the six months prior. But according to Baumohl, these prices may not last long.
“Farmers cannot afford the cost of feedstock,” he says, noting the rising prices of essentials like wheat and corn in recent months. “So more farmers are putting up their animals for slaughter, which means we have a temporary increase in the supply of meat. However in the next couple months, we may see meat prices really pick up.”
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Chicken and meat aren’t the only the foods to have declined in price. The cost of peanut butter declined by 4.9% during this time period. Neither economist we spoke with was sure exactly why peanut butter had declined. Regardless, college students, get yourselves to a supermarket and start stocking up!
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