After a historic run-up in inflation, Americans are now starting to see something they haven’t in three years: deflation.

To be sure, deflation—that is, falling prices—is largely confined to appliances, furniture, used cars and other goods. Economywide deflation, when prices of most goods and services continuously fall, isn’t in the cards.

But economists say goods prices likely have further to fall, which will ease inflation’s return to the Federal Reserve’s 2% target, perhaps as early as the second half of next year.

Prices for long-lasting items, known as durable goods, have fallen on a year-over-year basis for five straight months. In October, they were down 2.6% from their peak in September 2022, according to data released Thursday by the Commerce Department. 

That has helped bring down core inflation, which excludes the volatile food and energy categories, to 3.5% in October, from 5.5% in September 2022, as measured by the personal-consumption expenditures price index, the Fed’s preferred inflation gauge.

The prices of services such as home rental and car insurance continue to climb, albeit at a slowing pace. They were up 4.4% in October from a year earlier, slower than 4.7% in September but well above their pace before the pandemic.

Economywide deflation is rare and usually seen as a sign of stagnant or deeply depressed demand. By contrast, deflation in particular sectors is common. Indeed, before the pandemic, durable-goods prices fell an average of 1.9% a year from 1995 to 2020 as globalization shifted production to low-wage countries and productivity improvements lowered costs. 

The pandemic temporarily sent those forces into reverse. Product shortages, snarled supply chains and a surge in demand from consumers flush with cash sent prices soaring in 2021 and 2022. Durable-goods inflation peaked at a 47-year high of 10.7% in February 2022.

Research by Adam Shapiro, an economist at the San Francisco Fed, finds that supply disruptions such as those from closed factories or shipping backups accounted for roughly half the run-up in inflation in 2021 and 2022.  

Today, supply chains are running smoothly, according to a New York Fed index. Demand, meanwhile, has been constrained by the Fed’s interest rate increases. Consumer spending rose 0.2% in October before adjustingfor inflation, the weakest since May.

In a blog post published Thursday, the White House Council of Economic Advisers estimated better-functioning supply chains accentuated by weaker demand account for roughly 80% of the fall in inflation since 2022.

In October, the price of new and used motor vehicles and parts fell 0.4% from September, the fifth straight month of declines. Home furnishings were down 0.2% and recreational goods such as computer equipment fell 0.4%. 

Fed Chairman Jerome Powell said in September that decreasing goods-prices were a sign that higher interest rates, by weakening demand, in combination with smoother shipping, are actually working. 

But he has also emphasized that services inflation excluding housing also needs to come down.

Economists at Morgan Stanley forecast that core goods deflation will accelerate through the middle of next year because of improving supply chains and weaker demand. That will offset continued price increases for services. 

As a result, they see PCE inflation falling to 1.8% in September, below the Fed’s target. They don’t forecast a recession. That is much sooner than Fed officials who, in their September forecast, saw inflation returning to target in 2026. They will release new forecasts Dec. 13.

Prices equal the cost of inputs—labor, materials, capital—plus profit. When goods prices shot up, it was partly because wages and some inputs such as energy became more expensive. But it was also because limited supply coupled with strong demand enabled companies to expand profit margins. That suggested once those conditions subsided, prices and margins would retreat. 

“If you think of the supply problems as pushing up the price, the healing of supply problems should be pushing down the price back to whatever the equilibrium is,” said Alan Detmeister, an economist at UBS.

For instance, a shortage of semiconductors held down production of new vehicles, driving up their price by around13% over the previous year as of the first quarter of 2022. Auto manufacturers that year recorded windfall profits.

Vehicle production is now roughly back to where it was before the pandemic and prices have been flat since March, according to the Labor Department.  

Dealer inventories, measured as a share of sales, are climbing but remain far below prepandemic levels. 

“It’s likely that vehicles are going to be a downward push on inflation for a fair amount of the next year,” Detmeister said.

UBS forecasts inflation dropping to 1.7% in the fourth quarter of 2024. The bank also predicts a recession next year.

Businesses, having enjoyed strong price increases, are adjusting to price cuts.

Lower prices for lumber and copper, for instance, have held down growth in the average customer purchase, William Bastek, executive vice president for merchandising at Home Depot, told analysts on a Nov. 14 conference call.

At Walmart, the number of items with price cuts is up 50% over last year, John Furner, chief executive of Walmart U.S., told analysts Nov. 16.

“We’ve been in a pretty steep inflationary environment the last couple of years. So it’s good to see some of these prices come back in line,” he said.