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Goods inflation is finally fixed

Wall Street cheered the latest inflation report, which showed prices rose less than expected from April to May. Stocks jumped a snappy 1% on the news.

Consumers should be cheered, too. One month’s worth of economic numbers won’t automatically ease the pressure on the family budget, but one important trend is convincingly going the right direction: Inflation in goods is finally getting back to normal.

Inflation came unleashed around this time three years ago, as vaccines helped end the COVID pandemic, cooped-up consumers started going out again, and trillions of dollars in stimulus money turbocharged spending. Since that coincided with Joe Biden’s presidential term, many Americans blame Biden for eroding spending power. But it was mostly COVID-related factors that pushed goods prices up.

The pandemic triggered a huge shift in spending away from services toward goods since it was hard to travel or eat out but easy to order stuff online. Supply chain snafus also made some products scarce, and demand-supply imbalances sent prices soaring. In March of 2022, the one-year inflation rate for goods peaked at a whopping 14.2%.

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The annual inflation rate for goods is now 0.1%. What matters most to consumers isn’t the inflation number attached to any particular product; it’s how much their paycheck buys. Here, the news is good too. During the last three years, the cost of all goods combined has risen by 14%. Earnings have risen by 14.9%. So goods are no longer taking an inordinately large bite out of the typical paycheck as they have been for much of the last two years.

Yes yes yes, some prices are still elevated, as the following chart shows. Food and energy are still up by more than earnings during the last three years. Those are staples that are hard to cut back on.

But other things have gone up in price by less than earnings, such as clothing, furniture, and appliances. The cost of electronics and toys actually declined during the last three years. People don’t need to buy a new toaster or pair of shoes every month, but everybody needs to buy this kind of stuff sooner or later. Disinflation and deflation do help family budgets, even for non-staples.

There’s more evidence that commodity prices should continue to moderate and, in some cases, decline. Gasoline prices, perhaps the best consumer proxy for overall inflation, have dropped since the government gathered the data on May inflation to a national average of around $3.45 per gallon.

Retailers are cutting prices on thousands of items as shoppers get pickier and refuse to pony up for some things. Target (TGT), Walgreens (WBA), Ikea, Walmart (WMT), and other big chains have announced price cuts recently. McDonald’s (MCD), Burger King, and KFC (YUM) have new bargain meal options. If the job market continues to soften, as many economists expect, that will cool demand even more and cement the return of goods inflation to normal levels.

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Alas, inflation is not completely tamed. The overall inflation rate is now 3.3%, a huge improvement from the 9% peak in June 2022. But the Federal Reserve’s target is 2%, and nobody complained during pre-COVID times when it was a bit lower than that.

The bogeyman is now services, in particular just a few service categories. Services inflation is 5.2%, still well above the Fed’s target. During the last three years, the cost of all services combined rose by 18.3%, a bit more than incomes.

Rent is the big one, with rental inflation running 5.3% year over year. During the last three years, rents have risen 20.4%, 5.5 percentage points more than earnings. Since housing is most people’s biggest expense, that has been a budget killer.

FILE - Cashiers process purchases at a Walmart Supercenter in North Bergen, N.J., on Feb. 9, 2023. Retailers, including Walmart and Target, are stepping up discounting heading into the summer of 2024, as they hope to offer frustrated shoppers some relief from higher prices and entice them to open their wallets.(AP Photo/Eduardo Munoz Alvarez, File)
Slashing prices: Retailers, including Walmart and Target, are stepping up discounting heading into the summer of 2024 as they hope to offer frustrated shoppers some relief from higher prices. (AP Photo/Eduardo Munoz Alvarez.) (ASSOCIATED PRESS)

Restaurant meals are up by 21% during the last three years, in part because a shortage of workers has pushed up wages, with the cost passed on to consumers. We didn’t put auto insurance on the chart above because it would skew the scale, but those costs have soared by 47.1% since 2021, largely because fancier cars cost a lot more to fix and drivers are getting into more crashes.

The trend in services is also going the right way, however. The government’s measure of rent prices doesn’t take into account new leases, and many economists expect rent inflation to moderate during the coming months.

The Apartment List rental index, which does account for new leases, shows a modest decline in rents from the peak levels of 2022. The latest monthly report describes the rental market as “sluggish,” with “seasonal declines steeper than usual and seasonal increases more mild.” That means renters ought to have more leverage to negotiate cheaper rent when current leases expire.

As economists and politicians have learned, however, everybody has their own personal measure of inflation and rising prices can cause lasting consumer shell shock. Though the numbers show improvement, it could still be a while before Americans' estimation of the economy inflates.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.

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