Inflation is subsiding, but prices for goods will remain elevated for at least the next few months due to contracts that set prices months in advance.
After months of dealing with economy-stifling inflation, there is finally some good news on the horizon. The Federal Reserve’s inflation-combatting efforts are starting to pay off, and there are strong indications emerging that suggest the economy is cooling. Unfortunately, at the consumer level individuals will notice that prices for goods and services are remaining elevated.
While it’s great that this prolonged period of record-breaking inflation is starting to subside, a couple of questions become apparent. First, with prices of goods still high what exactly are the signs that the economy is deflating? And second, if that’s the case why will consumers still have to contend with high prices?
According to CNBC, the biggest indication that inflation is receding can be observed at the supply chain level. Namely, the cost to ship commodities has significantly fallen. Wholesale buyers are also paying lower prices for goods like cotton and beef.
Producers and buyers have been raising prices for goods in accordance with inflation for well over a year. Rather than being fully absorbed by the companies purchasing and shipping goods, businesses began passing them down to the consumer. It stands to reason that since those wholesale and shipping prices are starting to recede that the consumer should see a reduction in prices, too, but that isn’t the case.
The reason why consumers will have to contend with high prices relates to how far businesses plan ahead. CNBC pointed out that purchase contracts are set months in advance. This means that until those contracts start to expire, consumers will still have to pay higher prices for goods.
Additionally, prices of some goods are remaining elevated for other mitigating factors. For example, egg prices are currently soaring partially due to a severe bought of avian flu that has significantly hampered egg production nationwide. However, it’s not all doom and gloom for the consumer.
Mark Zandi, who works as the chief economist of Moody’s Analytics, assured the public that certain items would start to get cheaper sooner rather than later. “There are some prices, some goods for which prices are falling,” said Zandi. Consumers will likely especially notice prices for goods dropping at retailers who are still contending with an excess of inventory.
Price cuts will likely be especially notable in the leisure and luxury goods categories. This is because during periods of inflation, when consumers’ budgets are being tightly squeezed, consumers tend to cut out unnecessary purchases first. Thus, things like home electronics, appliances, and apparel will continue to be discounted.
For the time being though, consumers can still expect to pay more for things like coffee and beef. The high prices also extend to various services mostly in the restaurant and hospitality sectors. This is largely due to the fact that wages have increased, so even as inflation subsides, the extra money that companies are paying their employees to perform services will still be partially passed down to the consumer.
Overall, inflation is subsiding, and there is clear evidence of that. But consumers will have to be patient in order to see the effects of that across the board. The good news is that there is finally a light at the end of the tunnel.