Inflation is coming down. But it’s been three crazy years since COVID arrived in 2020 and set the economy on a series of wild swings that still haven’t fully abated. So what’s back to normal? And what isn’t?
The annual inflation rate is now 4.9%, down from a peak of 9% last June. Before COVID, it was around 2.3%. So overall inflation is still more than double the pre-COVID level. But the Consumer Price Index includes dozens of spending categories and some of them are back to pre-COVID trend lines.
The following two charts show the price changes in several important categories during the last four years, to capture the total change from the year before COVID until now. As a baseline, we’re including the change in average hourly earnings during that time in each chart. From April 2019 through April 2023, earnings rose 20%. So any product or service category where prices rose by less than that is a net win for consumers during four very volatile years.
Housing costs, including rent, have risen by about the same amount as earnings since 2019. That’s a bit deceiving, however. Housing costs barely rose from 2019 to 2021, largely because mortgage rates were at record lows. That boosted the affordability of both purchased homes and rented ones. Housing costs began to spike in 2022, as rates started going up. So even though the net change since 2019 has kept pace with earnings, housing costs have accelerated since 2021. If owners or renters feel like they’re getting squeezed, they’re right.
In many categories of goods, inflation has abated. Computers, TVs, and other types of electronics cost about 4% less than they did in 2019. Clothing prices are up 4.8% since 2019, barely 1% per year. Appliance prices are up by 15% since 2019, still less than earnings. Travel costs have yo-yoed, since they plunged during COVID, when everybody stayed home, then soared during the recovery. But overall, airfare is up just 9.6% since 2019, with hotel rooms up 14.2%—fairly modest gains.
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A few things never got dramatically more expensive during COVID, most notably college tuition, health care, and prescription drugs. But inflation for all three of those things was higher than average for many years prior to COVID, so a slowdown in already high prices doesn’t necessarily make them affordable.
What’s causing pain are several categories where prices remain elevated, and these tend to be things people spend a lot of money on. Food costs are up 25% during the last four years, about 5 percentage points more than pay. Transportation is also about 25% more expensive, including fuel, vehicles and maintenance.
Among durable goods, new vehicle prices are up 21%, with used vehicle prices up 38%. There was an insane spike in used-car prices in 2022, as a semiconductor shortage crimped production and caused a shortage of new cars. Many buyers switched to used, sending prices soaring. Used-car prices are now down about 7% on a year-over-year basis, but they rose so much in 2022 that they’re still way above pre-COVID levels. The same phenomena have pushed rental car prices up by 51% since 2019.
Oil, natural gas, gasoline, and electricity prices are down year over year, but they’re still well above 2019 levels. This isn’t so much a COVID story as the end of long period of overproduction by US drillers as the fracking revolution took hold in the 2010s. Energy firms performed poorly in the years before COVID and endured a bloodbath in 2020. They’re now much more disciplined and hoping to make sure prices don’t go too low.
Overall, inflation is heading in the right direction. Most goods are back to pre-COVID price trends, as spending flips back toward services, including travel and outings. Service inflation should come down too, as people spend down COVID-era savings and a strong labor market softens. But inflation has a long tail we may still feel it wagging for a few years yet.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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