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Understanding The New Buzzword for Today’s Economy: Deflation

December 11, 2023

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A Subtle Shift in the Market

In a rather unexpected turn, certain segments of the American market are experiencing deflation, particularly in durable goods – those items designed to last more than three years.

This trend, highlighted in recent reporting, shows a significant price drop in areas like used cars, furniture, and appliances. This shift is particularly noteworthy as it contrasts sharply with the steep price increases these items underwent during the pandemic.

The Impact on Overall Inflation

The deflation in durable goods is contributing to a potential easing of the overall inflation rate in the US. It’s an interesting development, considering that the Federal Reserve has raised its benchmark rate 11 times since early 2022 to counteract inflation.

With inflation rates showing signs of easing, most economists now anticipate that the Fed might pause further rate hikes, a decision that will be clearer after their next meeting on December 13.

Digital rendering of pink balloon with hand holding a pin next to it for ‘Understanding The New Buzzword for Today’s Economy- Deflation’ deflation
Deflation could mean both some pros and cons for the US economy. Photo by Getty Images.

Deflation: A Double-Edged Sword

While falling prices in certain sectors might seem like good news, widespread deflation across the economy isn’t necessarily a positive sign. Generally, deflation indicates a decrease in demand, often linked to recessionary periods.

It can lead to consumers postponing purchases in anticipation of further price drops, creating a cycle that stalls economic growth. This phenomenon was seen in Japan during the 1990s, resulting in a prolonged period of economic stagnation.

Person in white fencing gear with sabre for ‘Understanding The New Buzzword for Today’s Economy: Deflation’ deflation
Deflation can be a double-edged sword. Photo by Getty Images.

Current Economic Sentiment

Despite the cooling inflation, the mood among many Americans remains cautious. There’s a disconnect between the economic trends experts observe and the everyday experiences of consumers, who still feel the weight of higher prices compared to pre-pandemic levels.

Conclusion

Today’s economic landscape is marked by a unique blend of deflation in durable goods and an overarching effort to ease inflation. This balance is delicate, as the economy navigates between cooling off inflation and avoiding a deflationary spiral.

Curious about how these economic shifts could influence your investment strategy? Discover more with Supervest’s expertly curated resources, offering in-depth insights into the current market trends.

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