The COVID-19 pandemic shifted consumption away from services and toward durable goods in unprecedented ways. Consumption of durable goods and services both declined significantly during the first months of the pandemic. Yet, while consumption of services stayed below its pre-pandemic level for a long time, consumption of durable goods recovered in just a few months.
This difference in consumption was due to generous fiscal support and the pandemic’s shifting of consumption habits away from services such as eating in restaurants and traveling and toward purchasing furniture and fitness equipment.
The FRED graph above shows real personal consumption expenditures, normalized to 100 in December 2019, with durable goods in blue and services in red. By April 2021, consumption of durable goods was 33% above its pre-pandemic level, while consumption of services was still 3% below its pre-pandemic level.
This sharp increase in demand for durables together with the inability of supply chains to keep up with that demand exacerbated inflation in these goods (which is covered in depth in our St. Louis Fed Review article). This trend is reflected in the second FRED graph, where we see that inflation before the pandemic was about 2.5 percentage points higher for services (red line) than for durables (blue line).
In recent months, supply chains have started to slowly recover and demand for durable goods has started to decline. So, inflation in durable goods has fallen rapidly, from 18.7% at the peak in February 2022 to 2.4% in November 2022. At the same time, consumption of services has recovered, which has been accompanied by a steady increase in the inflation rate for services: In October 2022, inflation for services exceeded inflation for durables for the first time since the early days of the pandemic.
With services demand going up and labor markets tightening, the pace of increase or decrease in overall CPI inflation will depend on how services and durable goods adjust to new consumption habits.
How these graphs were created:
First graph: Search FRED for “real personalcConsumption” and select “Real Personal Consumption Expenditures: Durable Goods.” Use the “Edit Graph” button in the upper right corner to open the editing box: Change units to “Index (Scale value to 100 for chosen date).” Change the date to 2019-12-01. Next, click the gray “ADD LINE” tab at the top. In the search box, search for “real personal consumption services” and select “Real Personal Consumption Expenditures: Services” Scroll down to “Customize data”: Change units to “Index (Scale value to 100 for chosen date)” and change the date to 2019-12-01.
Second graph: Search FRED for “cpi durables” and select “Consumer Price Index for All Urban Consumers: Durables in U.S. City Average.” Use the “Edit Graph” button in the upper right corner to open the editing box: Change units to “Percent change from a year ago.” Next, click the gray “ADD LINE” box at the top. In the search box, search for “cpi services” and select “Consumer Price Index for All Urban Consumers: Services Less Energy Services in U.S. City Average.” Change units to “Percent change from a year ago.”