Raphael Stevens

Although buying inflation-protected bonds to protect against inflation does not seem unreasonable, it would have been a spectacularly unprofitable move during the latest bout of inflation. One hundred dollars put into inflation-protected Treasuries in December 2021, when investors first saw American core inflation reach 5%, would have been worth just $88 a year later. Even cash under the mattress would have done better.Safe to say, inflation-linked bonds are in trouble. Investors pulled $17bn from exchange-traded funds tied to them last year. Canada announced plans to cease issuing them in 2022; Germany did the same in November. Sweden is considering its options. Yet these countries are making a mistake. So long as their purpose is not misconstrued, inflation-linked bonds serve a vital function for markets and the governments that issue them.Why, then, do the bonds not always offer protection against inflation? Start by breaking down the sources of return for a bondholder. First comes coupons, payments received before a bond matures. The difference between inflation-linked bonds and their conventional counterparts is that these are not fixed in dollars, euros or pounds; instead, they rise with inflation, as does the bond’s principal. Their real value is preserved if inflation is unexpectedly high. So far, so inflation-protective.Yet for many investors a second mechanism will matter: changes in a bond’s price. Such changes reflect shifts in the market value of the future payments to which a bondholder is entitled. Here, a snag emerges. Real interest rates determine the present value of that future money: when rates rise, bond prices fall. And as was made painfully clear during 2022 and 2023, few forces raise long-term real rates as sharply as a central bank ferociously tightening monetary policy. Most of the time, this second mechanism matters more for inflation-linked-bond returns than the first. Indeed, it is what caused the $12 loss an investor would have made between December 2021 and December 2022.Although they do not always protect against inflation, the bonds do serve a wider purpose. For markets, their main value is isolating (and pricing) beliefs about economic concepts. Conventional bond yields package together two distinct forces: inflation expectations and real interest rates. Inflation-linked bonds disentangle them: their yield more cleanly expresses the market’s pricing of real interest rates. Likewise, the gap in yields between a nominal bond and an inflation-linked one gives the market’s pricing of expected inflation, known as “breakeven inflation”.Separating these concepts matters. For speculators, doing so means a more straightforward way to trade on macroeconomic pressures. For market observers, making real interest rates visible and tradable helps explain the pricing of almost any other financial asset. One way to view stocks, bonds and property is as a way to buy future payouts (dividends, coupons and rent, respectively). Each has real interest rates embedded in its price. And for central bankers, breakeven inflation offers a constantly traded measure of whether markets find their inflation targets credible.In fact, with appropriate caveats, inflation-linked bonds do even offer some inflation protection. They can outperform if inflation rises and central banks fail to raise rates in response, as in 2021 when most central bankers valiantly insisted that inflation was transitory. Shorter-duration inflation-linked bonds can provide payouts with lower exposure to rising interest rates, a bet that can be magnified with leverage if a speculator wishes. And long-term investors, such as pension funds, that hold the bonds to maturity are not much affected by fluctuations in a bond’s market price. Locking in inflation-linked cashflows helps them offset liabilities that are often also indexed to inflation.For bond issuers, this poses a trade-off. Pension funds and other risk-averse investors’ appetite for inflation-linked bonds means they may pay a premium for them. But other buyers may demand a discount because, with pension funds uninterested in selling, inflation-linked-bond markets are relatively illiquid. The empirical evidence on which effect dominates is spotty at best. Policymakers have reached varying conclusions. In 2012 analysis by New Zealand’s Debt Management Office prompted a ten-fold increase in the country’s inflation-linked bond issuance as a share of total issuance over the next decade. A study in 2017 for the Dutch government concluded the opposite: that limited liquidity made inflation-linked bonds more troublesome than helpful.Certainly there have been instances where governments have saved a great deal of money by issuing inflation-linked bonds. Britain’s first such bond issue in 1981 coincided with an 800-year high in British inflation. Whereas its price reflected expected annual inflation of 11.5%, it eventually paid out a realised inflation rate of just 5.9%. Recently, however, luck has run in the opposite direction for Britain and most other rich-world bond issuers. Spiking inflation has pushed up the coupon payments governments owe and prompted concern about rising debt bills.Sometimes, therefore, the bond issuer will win and sometimes it will lose. But in the long run the odds are in its favour. That is because inflation-linked bonds shift inflation exposure from bondholders to issuers, and markets offer compensation for those willing to take on risk. Moreover, it is risk that governments are well-placed to assume: high inflation tends to mean a higher nominal tax take, and more money to pay down debt.Forget bitcoin and goldOne question remains. If not inflation-linked bonds, what should an investor who was worried about rising prices have held in late 2021? Stocks performed worse, even if they bounced back, as did bitcoin. Gold and oil, however, held their value. A better trade still might have been to bet on the price of bonds falling—including those that are inflation-linked. ■Read more from Free exchange, our column on economics:Universities are failing to boost economic growth (Feb 5th)Biden’s chances of re-election are better than they appear (Feb 1st)The false promise of friendshoring (Jan 25th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter More

Only a few years ago, analysts and investors were aflutter with talk of a new “supercycle” in commodities. Some believed the world was about to repeat a surge in raw-material prices that began in the early 2000s, and lasted until the global financial crisis of 2007-09. This time the prompt was meant to be a mixture of a fast economic recovery, as the West emerged from covid-19 lockdowns, combined with a shift to green energy.Today the thesis looks far less certain. Prices of lithium and nickel, which are vital for electric-vehicle (EV) batteries, exploded in 2021 and 2022, but have since collapsed. Nickel is almost 50% cheaper than at the start of 2023. Lithium’s fall has been even steeper: its price is down by more than 80% over the same period. The Bloomberg Commodity Index, made up of a basket of foodstuffs, fuels and metals, has declined by 29% since its peak in mid-2022.Forecasts for oil demand now vary wildly, too, depending on assumptions about governments’ plans to wean consumers off the stuff. The International Energy Agency expects demand for oil to increase to 106m barrels per day (bpd) by 2028, up from 102bpd last year, and global demand to peak not far above that level. The Organisation of the Petroleum Exporting Countries, a cartel of oil producers, expects demand to rise more than twice as fast in the next five years, to 110m bpd, and then to keep rising for at least the next two decades.Commodity trading has never been simple: prices depend on unpredictable economic cycles, as well as the production capacity of drillers, growers and miners. But it is now nightmarish. On top of such concerns, investors have to contend with a barrage of political and technological uncertainties, which range from developments in battery tech to government appetite for subsidies. And it is these questions that will govern the pace of the green transition.Start with the EV market. It is clearly still growing: 14m EVs were sold worldwide in 2023, a 35% increase on the previous year. But how fast will it continue to grow? Both new and used EVs are sitting in American dealerships for longer than their petrol-powered rivals. Volkswagen, a German automaker, reports that EVs made up 8-10% of sales in 2023, down from 11% the year before. Ford and GM are among the carmakers to have delayed EV- and battery-plant construction over the past year. Wariness about the sector is dragging on the share price of Tesla, the market leader, which is down by 26% this year. And will evs still need the same battery materials? New sodium-ion batteries require neither nickel nor lithium. If they begin to supersede existing types, demand for the metals will plummet.Political considerations are also increasingly difficult to track, since the direction of travel is no longer one-way. Politicians across the rich world have started to worry about the costs involved in the energy transition. In September Britain delayed a ban on internal-combustion engines. Ahead of elections to the European Parliament in June, the draft manifesto of the centre-right European People’s Party now opposes an outright ban on such engines. Are these just cosmetic changes or the start of a deeper shift in green policies? Commodity investors need an answer.Nor is it only Western policies and demand that matter. During the last commodity supercycle, China’s construction of millions of flats, hundreds of thousands of miles of roads and all manner of other physical infrastructure kept demand for hard commodities growing fast. Now demand from the world’s second-largest economy is much less certain. Chinese economic growth has slowed considerably, and investment in property has slumped as the government attempts to steadily deflate a bubble of its own creation. At the same time, copper prices have proved to be astoundingly resilient, dipping just 9% during the past 12 months. This reflects China’s push for self-sufficiency in energy, including in solar and hydro power.Pity anyone whose job it is to forecast how these factors will play out over the next 12 months: if getting an accurate sense of the trade-offs in Western politics is tough, divining the approach of an increasingly cloistered Chinese government is close to impossible. It is clear that old methods of reading commodity markets are no longer sufficient. Without an understanding of the demand for new vehicles, the technology inside them and the politics of net-zero, any bets on the future of commodity markets will be little more than guesswork. ■Read more from Buttonwood, our columnist on financial markets: The dividend is back. Are investors right to be pleased? (Feb 8th)Bitcoin ETFs are off to a bad start. Will things improve? (Feb 1st)Investors may be getting the Federal Reserve wrong, again (Jan 24th)Also: How the Buttonwood column got its name More

The Office for National Statistics said U.K. gross domestic product shrank by 0.3% in the final three months of the year, notching the second consecutive quarterly decline.
All three main sectors of the economy contracted in the fourth quarter, with declines of 0.2% in services, 1% in production and 1.3% in construction output, the ONS said.

Skyline view of the City of London financial district.
Mike Kemp | In Pictures | Getty Images

LONDON — The U.K. economy slipped into a technical recession in the final quarter of last year, initial figures showed Thursday.
The Office for National Statistics said U.K. gross domestic product shrank by 0.3% in the final three months of the year, notching the second consecutive quarterly decline.

Though there is no official definition of a recession, two straight quarters of negative growth is widely considered a technical recession.
Economists polled by Reuters had produced a consensus forecast of -0.1% for the October to December period.
All three main sectors of the economy contracted in the fourth quarter, with the ONS noting declines of 0.2% in services, 1% in production and 1.3% in construction output.
Across the whole of 2023, the British GDP is estimated to have increased by just 0.1%, compared to 2022. For the month of December, output shrank by 0.1%.
U.K. Finance Minister Jeremy Hunt said that high inflation remains “the single biggest barrier to growth,” since it is forcing the Bank of England to keep interest rates firm and stymie economic growth.

“But there are signs the British economy is turning a corner; forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are down and unemployment remains low,” he added.

Inflation has come down markedly in the U.K., but remains well above that of the country’s economic peers and the Bank of England’s 2% target, squeezing household finances. The headline consumer price index reading came in at 4% year-on-year in January.
Notably, GDP per capita — which adjusts for population growth — contracted by 0.6% in the fourth quarter, after a 0.4% decline in the previous three months, and fell further through each quarter of last year. Over the whole of 2023, seasonally-adjusted GDP per head shrank by 0.7%.
‘Shallow and short-lived’ recession
Marcus Brookes, chief investment officer at Quilter Investors, said that the figures most likely indicate that the recession will be a “potentially shallow and short-lived one that may not reflect the true state of the economy,” which is set to experience a “muted recovery” throughout 2024.
“U.K. GDP contracting in both December and the fourth quarter of 2023 is mainly due to persistently high inflation, structural weaknesses in the labour market and low productivity growth, but also adverse weather conditions,” Brookes said via email.
“These factors affected the performance of the services and construction sectors, which are the main drivers of the U.K. economy.”
He noted that some of these hindrances are temporary and have already started to ease, with the inflation print of January undershooting forecasts for a reacceleration.
“Over the coming months, we expect inflation to fall, potentially easing the pressure on U.K. households, and supporting the recovery of the consumer-driven economy,” Brookes added.
“The key indicator to watch is inflation in the services sector, which accounts for the bulk of the UK’s economic activity and employment and reflects the strength of wage growth and consumer demand, which are crucial for the U.K.’s recovery.”
Neil Birrell, chief investment officer at Premier Miton Investors, said Thursday’s figure and the softer-than-expected inflation data “may give rise to some concern over economic strength in the coming year.”
“Most sectors of the economy were weak, but the optimists will point to the fact that there is plenty of scope to cut interest rates should the current trend in inflation and growth accelerate.” More

In midtown manhattan reminders of commercial property’s difficulties are everywhere. On the west side, near Carnegie Hall, stands 1740 Broadway, a 26-storey building that Blackstone, an investment firm, bought for $605m in 2014—only to default on its mortgage in 2022. Soaring above Grand Central station is the iconic Helmsley building. Its mortgage was recently sent to “special servicing” (it may be restructured or its owner may simply default). As the sun sets, the underlying problem becomes clear: working from home means fewer tenants. Floors bright with lights, where workers potter about, sit sandwiched between swathes of black.This is not a new development. Many buildings have stood empty for four years, since covid-19 struck. At first, owners hoped to wait out the pandemic. But workers were slow to return, meaning employers ended up downsizing. Vacancy rates, especially in shabbier buildings, rocketed. Then interest rates rose. Most commercial buildings are financed via five- or ten-year loans. And many of these loans will shortly be refinanced, while rates remain uncomfortably high. Some $1trn in American commercial-property loans will roll over within the next two years, an amount that represents a fifth of the total debt owed on commercial buildings.Recently a number of office buildings in big cities have traded at less than half their pre-pandemic prices. These sorts of losses will wipe out many owners’ equity, leaving banks to swallow hefty losses of their own. Indeed, three institutions have already been hit hard. In recent weeks New York Community Bank (NYCB), a midsized lender; Aozora Bank, a Japanese institution that hoovered up American commercial-property loans; and Deutsche Pfandbrief, a German outfit with exposure to offices, all reported bad news about their loan books and saw their shares plummet.Meanwhile, China’s property crisis is becoming more acute. With domestic portfolios struggling, some Chinese investors, who have bought property assets all over the globe, may need to raise cash—and could start dumping overseas assets, depressing property values. If consumers start to seriously struggle with rising interest rates on auto loans or credit cards, it is possible that more institutions will end up in a similar situation to that of nycb. Little surprise, then, that people are starting to fret that the move to working from home could end up causing a financial disaster.It is worth putting these problems into context, however. For a start, the problems at NYCB really do seem unique to the institution. Although the bank has exposure to New York offices, it in fact wrote down the value of its portfolio of loans on rent-stabilised “multi-family” apartment blocks in the city. These plunged in value after legislation in 2019 restricted the ability of owners to raise rents if an apartment was vacated, or if the landlord made capital improvements. The other lender that specialised in these sorts of loans was Signature Bank, which failed last year.Moreover, there is a limit to how big a problem offices can pose, even if the damage to them is severe. The total value of American property (not including farmland) was $66trn at the end of 2022, according to data from Savills, an estate agency. Most of that is residential. Only a quarter is commercial. And commercial property is much more than just offices. It includes retail spaces, which are struggling, but also warehouses, which are in demand as data-centres and distribution points, and multi-family buildings. Offices are therefore worth perhaps $4trn, or about 6% of the total value of property in America.Between 2007 and 2009 residential real estate in America lost a third of its value. A similar shock today would wipe $16trn from total property values. Even if every office building in America somehow lost its entire value, the losses would still be just a quarter of that size. On top of this, lenders are better protected against losses in commercial property than they were against those in the residential sort. Whereas loans for the latter were often close to 100% of a building’s value, even the most ambitious commercial-property loans tend to cover just 75% of a building’s value.BloodshedThe wound inflicted by commercial property is best likened to that caused by a slip of a kitchen knife—it is nasty, obvious and painful. Stitches might be required. But it is unlikely to grievously injure the victim.Nor will the wound fester unnoticed. Because property problems are so visible, regulators are all over them. About half of commercial-property debt is loans from banks (and mainly from smaller ones, since rules discourage large institutions from such lending). The rest is securities or loans from insurers. The Office of the Comptroller of the Currency, a regulator, reportedly advised NYCB to write down the value of some of its loans more aggressively, making them obvious when it reported earnings on January 31st. Across the pond, the European Central Bank has asked banks to set aside extra reserves to cover loan losses in commercial property.America’s economy, which is still growing smartly, offers extra protection. Look up at New York’s empty skyscrapers and it is easy to feel alarmed. But cast your gaze back down to street level and you can calm yourself. The streets are bustling. Shops are packed. Restaurants are full. America is healthy and on the move, even if it could do with a bandage for that nasty cut. ■ More

The Uber Technologies, Inc. logo is seen on a building on December 21, 2023 in New York City.
Eduardo Munoz Alvarez | VIEW press | Getty Images

Check out the companies making headlines in midday trading.
Uber — Uber’s shares jumped 11%, climbing to a new 52-week high, after the ride-hailing company announced an inaugural $7 billion share repurchase authorization program. Uber also said it expects gross bookings growth to be in the mid to high-teens over the next three years.

Lyft —  Shares of the ride-hailing platform surged 31% after the company posted adjusted earnings of 18 cents per share in the fourth quarter, more than the LSEG consensus estimate of 8 cents per-share earnings. Lyft reported revenue of $1.22 billion, which was in line with analysts’ expectations.
IQVIA Holdings — The health tech company saw its shares rise 10% after it posted fourth-quarter earnings of $2.84 per share, excluding items, compared to the $2.82 per share expected by analysts, according to FactSet. Revenue of $3.87 billion for the quarter was slightly above estimates of $3.8 billion.
Charles River Laboratories — The drug maker gained 9% after fourth quarter adjusted earnings of $2.46 per share beat analysts’ estimates of $2.40 per share, according to FactSet. Charles River posted $1.01 billion in revenue, while analysts anticipated $991.3 million. The higher end of the company’s full-year earnings per share guidance, $11.40, was also above estimates of $10.83 per share.
DaVita — The health-care company jumped 7% after posting a beat on top and bottom lines. On Tuesday, DaVita posted earnings of $1.87 per share, ex-items, on $3.15 billion in revenue. Analysts polled by FactSet had estimated earnings of $1.63 per share on $3.01 billion in revenue.
Robinhood Markets — Shares of the trading platform jumped 9% after the company posted a surprise earnings and revenue beat. Robinhood posted earnings of 3 cents per share, while analysts expected a 1 cent per share loss, according to LSEG. Revenue came in at $471 million, topping the $457 million expected by analysts. 

Zillow — Shares rose more than 6% after the real-estate marketplace posted adjusted earnings of 20 cents per share on revenues of $474 million. Zillow beat analysts’ estimates of 12 cents per share on revenues of $452 million, according to LSEG.
Crypto stocks — Stocks whose performance is tied to the price of bitcoin surged after the cryptocurrency rose to a more than two-year high and regained its $1 trillion market cap. Trading platform Coinbase gained about 13% and bitcoin proxy Microstrategy added 10%. Miners Iris Energy rocketed nearly 15% and CleanSpark surged 9%. Marathon Digital and Riot Platforms added more than 10% each.
Topgolf Callaway — Shares advanced 6% midday after the sports equipment company posted a narrower-than-expected adjusted loss for the fourth quarter of 30 cents per share, compared to a loss of 33 cents per share as expected by analysts, according to LSEG. Revenue of $897 million topped analysts’ estimates of $866 million.
Akamai Technologies — Shares slipped 8% after the cloud platform provider missed analyst expectations for fourth-quarter revenue. Akamai posted $995 million, under the forecast of $998 million from analysts polled by LSEG. Elsewhere, the company earned $1.69 per share, excluding items, topping the $1.60 per share figure anticipated by analysts.
MGM Resorts International — Shares dropped 8% despite the company’s better-than-expected fourth quarter results. The company reported an earnings and revenue beat in the fourth quarter.  Although the company’s China and Macau segments handily beat expectations, the U.S. regional casino segment suffered from effects of a strike in Detroit and labor costs.
Kraft Heinz — The food products stock fell more than 6% after fourth-quarter revenue missed expectations. Kraft Heinz reported $6.86 billion of revenue, but the $6.99 billion projected by analysts, according to LSEG. The company’s adjusted earnings per share of 78 cents was one cent above analyst estimates.
Airbnb — Shares dropped about 3% even after the vacation property rental platform posted a fourth-quarter revenue beat. Airbnb reported a 55-cent loss per share, and it was not immediately clear how it compared with analysts’ estimates of a 62-cent per share profit, per LSEG. Airbnb also warned of some pressure on nights booked in the first quarter due to tough comparisons.
Hasbro — The toymaker rose nearly 3%, rebounding from its decline during Tuesday’s trading session. The stock fell after Hasbro’s fourth-quarter earnings and revenue missed analysts’ estimates. The company also posted weaker-than-expected guidance for its full-year revenue.
 — CNBC’s Hakyung Kim, Alex Harring, Jesse Pound, Pia Singh and Michelle Fox contributed reporting. More

Some segments of the U.S. economy are seeing deflation, meaning prices are falling for consumers.
That’s largely happening for physical goods such as furniture and bedding, clothing, household appliances, electronics, toys and sporting goods.
The services side of the economy is more sensitive to labor costs, economists said. Relatively high wage growth has kept inflation for services more elevated.

Customers shop at an RC Willey home furnishings store in Draper, Utah, Aug. 28, 2023.
George Frey/Bloomberg via Getty Images

Inflation has pulled back significantly from its pandemic-era peak. In fact, some categories have fallen into outright deflation, meaning consumers are seeing the prices decline instead of rise.
Deflation has largely occurred among physical goods rather than services, economists said. The former are tangible objects, while the latter are largely things we can experience, like haircuts and veterinary visits.

Demand for goods soared early in the Covid-19 pandemic, as consumers were confined to their homes and couldn’t spend on things such as travel or concerts. The health crisis also snarled global supply chains, meaning volume couldn’t keep pace with demand for those goods. Such supply-and-demand dynamics drove up prices.
Now, they’re falling back to earth.

So-called “core” goods inflation — which exclude food and energy prices, which can be volatile — was negative 0.3% in January 2024 relative to a year earlier, according to the latest consumer price index data issued Tuesday by the U.S. Bureau of Labor Statistics.
“Supply chains are going back to normal,” said Jay Bryson, chief economist for Wells Fargo Economics. “And on the demand side, there’s been somewhat of a rotation from goods spending back toward services spending.”
“We’re kind of reverting back to the pre-Covid era,” he added.

A shift away from spending on goods

Average prices have deflated for these physical goods, among others, from January 2023 to January 2024: furniture and bedding (prices have fallen by 2.9%); major household appliances (-7.3%); men’s suits, sport coats and outerwear (-5.3%); girls’ apparel (-9%); video and audio products (-5.8%); sporting goods (-1.1%); toys (-4.2%); and college textbooks (-5.7%), according to CPI data.

Prices for used cars and trucks have also deflated over the past year, by 3.5%, according to CPI data.
Used and new vehicle prices were among the first to surge when the U.S. economy reopened broadly early in 2021, amid a shortage of semiconductor chips essential for manufacturing.

These are the big deflationary factors

“A lot of factors have come together to push goods prices down,” said Mark Zandi, chief economist at Moody’s Analytics.
In addition to normalizing supply-demand dynamics, a historically strong U.S. dollar relative to other global currencies has also helped rein in goods prices, Zandi said. This makes it cheaper for U.S. companies to import goods from overseas, since the dollar can buy more.

The Nominal Broad U.S. Dollar Index is higher than at any pre-pandemic point dating to at least 2006, according to U.S. Federal Reserve data. The index gauges the dollar’s appreciation relative to currencies of the U.S.′ main trading partners such as the euro, Canadian dollar, British pound, Mexican peso and Japanese yen.
Falling energy prices have also put downward pressure on goods prices, due to lower transportation and energy-intensive manufacturing costs, economists said. Overall energy costs have fallen by 4.6% in the past year.
However, economists fear that attacks by Houthi militias on merchant vessels in the Red Sea — a major trade route — could cause shipping disruptions and a reversal of some goods deflation.

Lower energy prices also put downward pressure on the transportation of food to store shelves.
Among grocery items, egg and lettuce prices declined significantly from January 2023 to January 2024 (by 28.6% and 11.7%, respectively) after having soared in 2022. Among the reasons for those initial shocks: a historic outbreak of avian influenza in the U.S., which is extremely lethal among chickens and other birds, and an insect-borne virus that raged through the Salinas Valley growing region in California, which accounts for about half of U.S. lettuce production.
Egg prices have started to climb again in recent months, however, due to a comeback of avian flu.
Overall grocery prices rose at a 1.2% pace in the past year, according to CPI data.

Why aren’t services deflating, too?

The average American allocates most of their budget — about two-thirds of it — to services instead of goods.
The services sector of the U.S. economy has seen disinflation — which is when prices are still rising but at a slower pace than they had been — but hasn’t sunk into deflation like core goods. Services inflation (minus energy) is still up 5.4% since January 2023, according to CPI data.
More from Personal Finance:Here’s the inflation breakdown for January 2024 — in one chartWhy the ‘last mile’ of the inflation fight may be tougherWhy disinflation is ‘more ideal’ than deflation
Services businesses are more sensitive to labor costs, economists said.
A hot job market as the economy reopened in 2021 led workers’ wage growth to balloon to its highest in decades. Average earnings have cooled along with the broader labor market but remain elevated relative to their pre-pandemic baseline, they said.
“The most recent [Employment Cost Index] wage growth numbers for Q4 2023 came in below 4% annualized (first time since Q2 2021), which reflects the better balance between labor demand and supply that has been achieved by rebalancing,” according to a recent outlook authored by J.P. Morgan’s Global Investment Strategy Group.

Some services categories have deflated, though.
Airline fares, for example, have fallen by 6.4% in the past year. That’s due to factors such as lower jet fuel costs for airlines and an increase in seat capacity (available seat supply for passengers due to greater flight volume) on domestic and international flights, according to Hopper.

How measurement quirks can cause deflation

Elsewhere, some deflationary dynamics are happening only on paper.
For example, in the CPI data, the Bureau of Labor Statistics controls for quality improvements over time. Electronics such as televisions, cellphones and computers continually get better. Consumers get more for roughly the same amount of money, which shows up as a price decline in the CPI data. 

Health insurance, which falls in the services side of the U.S. economy, is similar.
The Bureau of Labor Statistics doesn’t assess health insurance inflation based on consumer premiums. It does so indirectly by measuring insurers’ profits. This is because insurance quality varies greatly from person to person. One person’s premiums may buy high-value insurance benefits, while another’s buys meager coverage.
Those differences in quality make it difficult to gauge changes in health insurance prices with accuracy.
Health insurance prices declined by 23.3% over the past year. That decline reflects smaller insurer profits in 2021 relative to 2020.
These sorts of quality adjustments mean consumers don’t necessarily see prices drop at the store, just on paper. More