Good news! Prices are falling. But it might be for bad reasons
The lowest inflation rate in four-years was made possible by a trend that will surely bring smiles to the faces of Americans: Falling prices.
Egg prices plunged between March and April by the most since 1984, according to the Bureau of Labor Statistics. Used cars and trucks unexpectedly got cheaper despite auto tariffs. So did clothes.
Those price drops are encouraging and should help families who are hurting from the high cost of living.
But not all price drops are created equal. Some of the good inflation news might be happening for a bad reason: a weakening economy.
In Tuesday's report, some price drops hint at softer demand from consumers facing an onslaught of policy changes out of Washington, a confusing trade war and turbulence in financial markets.
For example, airfare fell 2.8% in April, marking the third-straight monthly decline. Prices for hotels, motels and other lodging away from home dipped too. Ticket prices for sporting events plunged by 12.2%, the biggest monthly decline on record.
'Those are tell-tale signs of consumer stress. This is the never-ending daily chaos exacting a cost on the economy,' said Joe Brusuelas, chief economist at RSM.
Samuel Tombs, chief US economist at Pantheon Macroeconomics, wrote in a note Tuesday that high uncertainty and anemic consumer confidence are causing 'weak demand' for some discretionary services.
Tombs noted, for instance, that Google searches for phrases including 'flights' were very low in April.
Faced with fragile demand, some companies have been forced to lower their prices to lure customers. And that in turn has helped to lower the annual inflation rate to 2.3% in April, the lowest annual rate since February 2021.
The declines in airfare and hotel pricing 'may be indicative of weakening demand for discretionary services,' Bank of America economists wrote in a note on Tuesday. 'That bears watching in the high frequency data…as it could be evidence that sentiment is weighing on consumption.'
Consumer confidence has plunged this year amid widespread concerns about tariffs and turmoil in financial markets. However, that drop in sentiment has not translated to a significant pullback on consumer spending, the main driver of the US economy.
Others argue it's far too early to conclude that consumer demand really is faltering.
The timing of Easter may have 'mucked' with prices for air travel, hotels and elsewhere, noted Ryan Sweet, chief US economist at Oxford Economics. He said the drop in prices for sports 'could be more noise than signal.'
'I don't think consumers are running for the bunker,' Sweet told CNN in an email. 'If consumers were hunkering down, they would cut back on dining out and going to the movies.'
Although AMC Theatres is offering 50% off tickets on Wednesdays this summer, restaurants are hardly empty.
In fact, the number of seated diners in the United States from online reservations was 10% higher in April year-over-year, according to OpenTable data. Seated diners so far in May are up 8%.
And restaurants don't appear to be slashing prices to attract diners.
The BLS found that food prices for full-service meals and snacks increased by 0.6% between March and April, outpacing broader inflation.
One obvious example of soft demand is airfare.
Some major airlines have recently cut their financial guidance due to concerns about the health of the US economy.
Delta Air Lines warned on April 9 that 'growth has largely stalled' due to 'broad economic uncertainty around global trade.' (President Donald Trump would walk back some of his most aggressive 'reciprocal' tariffs later that day, sending US markets skyrocketing).
American Airlines told CNBC last month that domestic leisure travel 'fell off considerably' starting in February.
Of course, cheaper airfare is not solely about weaker travel demand from US consumers.
Another factor: Foreign travel into the United States has cooled.
Foreign visitors to the United States by air are down 2.5% through the end of April, according to the Commerce Department's International Trade Administration. United Airlines reported steady declines in international passengers originating in Europe and Canada.
Goldman Sachs said the drop in airfare, and hotel prices, may reflect 'softer demand for business and government travel and from foreign tourism.'
Airlines have also been able to cut airfare because fuel has gotten cheaper as a result of the drop in oil prices.
Falling oil prices also helped push down the inflation rate by lowering prices at the gas pump.
US crude oil prices plunged last week to a four-year low of $57.13 a barrel, though they have since bounced back to around $64.
The drop in oil prices has been driven by both 'good' factors – namely, more supply from OPEC and near-record output from US producers – and by 'bad' reasons like concerns about the health of the world economy and the fallout from the trade war.
No matter the cause, many economists worry the subdued inflation readings won't last because of the trade war.
Marco Casiraghi, senior economist and strategist at Evercore ISI, told CNN the impact on prices from historically-high tariffs will strengthen in the coming months.
'We know it's coming,' Casiraghi said. 'This looks like the calm before storm.'
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