Online prices fall for the first time in two years

Online shoppers are finally seeing lower prices on some products, a sign that the searing inflation that has burned the U.S. economy may be starting to cool.

Online prices began falling in July, the first decline in two years, falling 1% from a year ago, new data from Adobe Analytics shows. The biggest declines were for electronics, clothing and toys, while prices for jewellery, books, computers and sporting goods also fell.

“As we’re seeing prices in major online categories like electronics and apparel start to come down, we’re seeing overall online inflation come down,” said Adobe Digital Insights manager Vivek Pandya.

Prices for electronics, including televisions, smartphones, tablets and cameras, the largest category of online spending, fell at an annual rate of 9.3%, according to the Adobe Digital Price Index.

Inflation in other online categories remains strong. Grocery prices in July rose a record 13.4% from a year ago, the most for any category. The cost of online pet products rose 12.6%, in part because pet ownership became more popular during the pandemic, fueling demand for related products.

Why are prices falling?

Softer consumer demand and robust inventory are contributing to lower prices for discretionary items such as electronics and apparel.

“On the one hand, it’s a situation where [online retailers] they have built up excess inventory because the level of demand they were seeing in earlier years like 2020 and 2021 has come down, so there has been a surplus in those categories,” Pandya told CBS MoneyWatch.

Basics like groceries and gas also now consume a larger share of family budgets, leaving less additional income for other products.

“We are also seeing demand coming down because consumers have had to deal with price increases quite significantly in 2022,” Pandya added. “Retailers are seeing surpluses as consumer budgets to spend more on discretionary items begin to become more limited.”

The cost of other products such as sporting goods is falling as Americans spend more time outside, allowing them to exercise outdoors or at the gym.

“This is a category that when people were confined, they bought a lot of sporting goods and equipment. Today it’s a discretionary category that consumers can do without if they need to for a while, or until prices drop further, which is stunting growth,” Pandya said.

Overall, online spending fell to $73.7 billion in July, from $74.1 billion the previous month, as more people returned to brick-and-mortar stores.

Turning the corner?

A drop in online prices offers hope that broader measures of inflation have peaked. The Labor Department is scheduled to release its latest consumer price index, which measures the cost of a broad basket of goods, on Wednesday. Inflation hit a new 40-year record in June, with consumer prices grow by 9.1% during the last 12 months.

Air fares and gas prices, which contributed to last month’s high inflation reading, fell in July, noted David Kelly, chief global strategist at JPMorgan Funds.

“Falling prices for food staples, a small drop in wholesale used car prices and reports from purchasing managers showing slower growth in prices paid” suggest July’s monthly inflation figures could to be the lowest in more than a year, he said in a research note on Monday.

Gas prices have been falling for two months, from an average of $5 a gallon in early June to just over $4 today. Falling gas prices should reduce the headline inflation rate by 1 percentage point over the next year, Jan Hatzius, chief economist at Goldman Sachs, told investors in a report.

Hatzius also notes that the rampant supply chain bottlenecks that led to product shortages early in the pandemic are starting to ease, resulting in improved delivery times and slower inflation for producers.

A new survey by the Federal Reserve Bank of New York suggests Americans in July were more optimistic that inflation might be loosening its grip on the economy. “Expectations for gas and food price increases for next year fell sharply,” the bank said in a report.

These expectations are critical because they can drive inflation if consumers and businesses believe prices are likely to continue to rise, which can weigh on spending and investment.