The Surprising Truth About Falling Consumer Prices

TL;DR

Goods inflation is slowing down while service inflation remains elevated, indicating a shift in the inflation landscape. Freight rates and food prices are expected to decline in the first quarter of 2023, leading to a significant drop in goods inflation.

Transcript

watching the correlation between Freight rates and PC Goods inflation so the goods inflation component of the pce price index that the FED measures we should expect inflation and goods to be gone by may this year that is a dramatic change of scenery compared to 2022 when Goods inflation was very elevated we are basically standing at a crossroads ri... Read More

Key Insights

• 👋 Inflation dynamics are shifting, with service inflation surpassing goods inflation.
• 👋 Goods inflation is less significant as the economic cycle slows down.
• 😋 Food prices are expected to decline in the first quarter of 2023.
• 😘 Falling freight rates from China will lead to lower prices for goods at the consumer level.
• 👋 The importance of goods in the consumer basket has increased, impacting inflation calculations.
• 👋 Rapid deceleration in goods inflation is expected by May 2023.
• 👋 Changes in transportation costs heavily influence the overall price of goods.

Questions & Answers

Q: What is the current trend in inflation for goods and services?

Goods inflation is no longer as important as service inflation, as the economic cycle slows down. Goods prices are dropping monthly, while service inflation remains elevated due to the labor market and physical economy performance.

Q: Why are goods prices important in the inflation calculation?

Throughout the pandemic, households spent more on goods, increasing their weight in the consumer basket. While updated weights will be introduced, goods prices currently have significant importance in the inflation equation.

Q: Can we expect a decline in food prices?

Yes, food prices have already shown a slowdown in the fourth quarter of 2022 and early 2023. It typically takes a few months for the Consumer Price Index to capture such moves, so food prices are expected to decline in the first quarter of the year.

Q: How do freight rates impact the price of goods?

Freight rates play a crucial role in determining the prices of goods. As freight rates from China to the West decline due to easing supply chains and weakening demand, the price of goods at the consumer level is expected to decrease over time.

Summary & Key Takeaways

• Inflation dynamics are changing as the economic cycle slows down, with goods inflation becoming less significant compared to service inflation.

• The importance of goods in the consumer basket has increased, leading to a focus on goods inflation throughout the first quarter of 2023.

• Food prices have been elevated but are expected to decline in the coming months, impacting the overall inflation calculation.

• Freight rates from China are falling, which will eventually lead to lower prices for goods at the consumer level.