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Deflation Trend Could Pull Inflation Back to 2%

Deflation has made its presence known, and could help bring inflation down to 2%.

That’s according to a Sunday (Dec. 3) report by The Wall Street Journal, which noted that this falling price trend mostly applies to appliances, furniture, used cars and other goods and that economywide deflation is not likely.

Still, economists say goods prices are still likely to keep dropping, which will make it easier for inflation to get back to the 2% target set by the Federal Reserve, possibly as early as the second half of 2024, the report said.

According to WSJ, Morgan Stanley economists project that core goods deflation will accelerate through the middle of next year as supply chains improve and demand cools, offsetting continued price increases for services. 

Consequently, they forecast that personal consumption expenditure inflation will drop to 1.8% in September 2024, lower than the Fed target, and much sooner than central bank officials, who don’t see inflation returning to their target level until 2026.

Incidentally, research by PYMNTS Intelligence shows that most consumers don’t see inflation returning to 2021 levels until October of next year.

Meanwhile, the most recent Personal Consumption Expenditures Price Index (PCE) from the Commerce Department showed that the prices for food and services continued to increase as consumers upped their spending on experiences and travel. 

“October’s activity, as measured in the Thursday report, may be a precursor to holiday season spending, and where we may see some budgetary pressures down the line, as PYMNTS Intelligence data has uncovered that individuals are using cards, among other options, to pay for those experiences,” PYMNTS wrote last week.

Headed into the final months of the year, it seems that travel and experiences will continue to be a major area of spending, springboarding off a summer in which PYMNTS Intelligence detailed that the number of leisure travelers rose by 22% this year compared to 2022.

PYMNTS Intelligence noted in October that credit cards “continue to be the preferred choice” of consumers for financing their leisure travel expenses — a method chosen by two-thirds of respondents. The use of cards has been embraced by a majority of consumers across all age groups: 76% of baby boomers and seniors, 53% of Generation Z consumers and roughly two-thirds of Gen X and millennials.