Layoffs

Inflation Has Come Down, But High Prices Are Here to Stay


With the widely-feared recession never materializing, U.S. GDP growing steadily and an unemployment rate of around 4 percent, it's hard to argue that the U.S. economy is not doing at least reasonably well. Add to that the fact that stock prices are near record highs and you'd think that Americans would be delighted about their country's resilience in the face of so many crises around the world. And yet, 46 percent of Americans describe current economic conditions as “poor” and more than 50 percent say they're worse off than they were four years ago, according to a recent Gallup poll. One of the main reasons for this dissonance is probably inflation, or, more accurately, what the past two and a half years of elevated inflation have left us with high prices. Despite inflation cooling to 2.4 percent or the lowest level since February 2021 in September, sticker shock is still real as many prices have not and probably won't come back down to pre-crisis levels.



Whenever we're discussing inflation coming down, it’s important to distinguish between disinflation and deflation. What we’ve seen over the past two years and hope to see more of is disinflation, i.e. a deceleration of price increases (yes, increases), or - mathematically speaking - a negative second derivative of consumer prices. For the overall price level to actually come down, the first derivative, i.e. the inflation rate itself would have to drop below zero, which would signify deflation. While the Fed desperately fought for inflation to decelerate, it is aiming for 2 percent inflation, not deflation, because the latter creates a whole set of problems on its own.

As the following chart shows, the inflation rate (red line) has come down quite a bit from its June 2022 peak of 9.0 percent. However, consumer prices (blue line) have continued to climb and are now 21.5 percent higher than they were in January 2020, just before the start of the Covid-19 pandemic. So while some prices will or have already come back down from their peaks as supply chain disruptions ease and global crises recede, prices will likely continue to rise at the aggregate level, albeit hopefully at a slower rate. Moderately rising prices are not a problem as long as wages keep up with those price increases. While that hasn't been the case from April 2021 to April 2023, when real wages in the United States actually declined on a year-over-year basis, real wages have returned to growth since then and are now slightly higher than they were before the pandemic.

Despite inflation cooling off significantly in recent months, prices for many everyday products remain significantly higher than they were two or three years ago. In light of higher price levels, buying second-hand products is often a viable option to save some money without making too many sacrifices. Whether it’s clothes, electronic devices, or household goods, online platforms have made selling and buying used goods a lot easier in recent years.

But despite Macklemore’s 2012 smash hit “Thrift Shop” celebrating the hunt for used clothes with only “20 dollars in your pocket”, Statista Consumer Insights data suggests that buying second-hand is not too common among Americans. According to a survey of 10,000 U.S. adults, clothing and shoes are the first choice when it comes to second-hand shopping, but with just 30 and 19 percent of respondents claiming to have made a second-hand purchase of clothing or shoes, respectively, in the past twelve months, it's hardly fashionable to go "thrifting".

The share of respondents buying second-hand is even lower for other categories, with just 12 percent saying they bought used consumer electronics in the past 12 months, which is surprising given the size of the secondary market for smartphones for example. 41 percent of respondents said they hadn't bought anything second-hand in the past twelve months.

Post a Comment