Are We in Deflation?

Listening to Dr Peter Linneman's most recent podcast, he makes a dramatic point. We are in deflation if you remove housing, the CPI, and PCE (personal consumption expenditures). A gut check on this makes sense. Remember when egg prices went crazy? Egg prices peaked in December of 2022 at over $5 per dozen. This December, egg prices were cut in half to around $2.50. Eggs have had the most significant price decrease, followed by lettuce, apples, and fish. The price of food (and many other things) overshot highs and are now trending toward long-term averages. Provided we don't have another black swan or deep recession, we are correcting back to mean.

We see it all the time. When prices increase rapidly, they tend to overcorrect in the opposite direction.

Source: Linneman Associates Capital Markets Webinar - youtube

The St. Louis Fed data points to a home price increase of 46% since 2020. Housing has put so much pressure on the consumer that something has to break. It will start with consumers decreasing their disposable spending on vacations and restaurants. Nondisposable items like gas, vehicles, and food will be hit next, overwhelmingly affecting the most economically challenged and vulnerable in the U.S. This could put more downward pressure on the prices of goods and services. I would not be surprised if we saw the chart above trend increasingly negative throughout 2024.

Home Prices Have Increased 46% Since 2020

Source: St. Louis Fed, FRED Economic Data, House Price Index