What Goes Up Must Come Down

Answer: According to Investopedia, disinflation is the temporary slowing of inflation. The term refers to the rate of change in the rate of inflation. Clear as mud, right? As a refresher, inflation is a sustained increase in prices of goods and services. Deflation is when prices of goods and services declines for a continuous period and stagflation which combines high inflation and stagnant economic growth. 

Currently, U.S. inflation is stubborn and persistent. For perspective, the June 2022 inflation rate of 9.2% was the highest inflation rate since 1981 when it was 10.3%. This was brought about after the 1979 Iranian Revolution which led to higher oil prices, government spending, and rising wages.

Deflation occurred during the Great Financial Crisis of 2009, and again in 2015 when crude oil fell to less than $40 per barrel. Factors influencing this low oil price were booming U.S. oil production, shifting OPEC policies (Organization of the Petroleum Exporting Countries), and reduced geopolitical concerns all contributing to a major decline in energy and gas prices. At both of those times the consumer price index (CPI) fell below zero. 

There are signs of more disinflation in the pipeline as economic growth moderates. Consumers are pushing back in response to higher prices causing major retailers to slash prices. Walmart, Target, and other major retailers such as Amazon and Walgreens are discounting prices to provide relief to consumers. This is the first “price war” we’ve seen in ages. McDonald's, Jack-In-the Box, Wendy’s, and Taco Bell are promoting value meals and discounting prices in response to consumer push back to unaffordable prices. Travel discounts are perking up too with predictions being made by booking apps of airfare and cruise ship price drops for the first time since 2020. 

Economic growth is slowing as earnings from restaurants, tech companies, airlines and more indicate more moderate growth rates. One so-called bright spot for the economy is the uptick in capital expenditures for Artificial Intelligence spending which rose nearly 6% year-over-year in the first quarter of this year. 

Payroll dollar amounts are increasing with existing labor markets and valued employees on solid ground. Companies appear to be more cautious with new hiring with a focus on cost control and operational efficiencies. Labor is known to be the largest expense for most companies. We’re keeping a close eye on hiring plans, especially for small businesses and the services sector which accounts for 83% of total employment. Job cuts announcements are increasing with new jobs added numbers well below expectations. Job openings are currently at their lowest levels since March 2021 and manufacturing indices have contracted. The labor market continues to cool amidst a slowing economy. 

Hiring qualified employees is a challenge and has been a theme since the pandemic. With a reduction in job openings, this is less of an issue today with lower “quit” ratios and fewer job openings based on cost constraint caution. The bottom line is that “disinflation” is a real phenomenon requiring patience from consumers, manufacturers, and employers. We’re still experiencing positive economic growth in the midst of cooling employment and moderating inflation. Inflation is real as easily seen with higher prices for food, housing, and gasoline. 

Disinflation recently reemerged as inflation slowed from its previously higher levels; this is actually healthy. Lower consumer demand in the first quarter of 2024 brought GDP down and helps slow inflation. The problems arise when inflation falls to zero, and we’re a way off from there. Stay focused and plan accordingly.