Could inflation be on its way toward negative territory? This is the theory that some market watchers are presenting as the divergence between US government statistics and alternative private-sector measurements widens. If true, consumers should not expect pre-crisis prices but less of that nagging feeling in their wallets, also known as deflation.
The Rise of Deflation
After enduring the post-pandemic Great Inflation period – the worst attack on America’s cost-of-living in more than 40 years – the man on Main Street opened his Econ 101 textbook from high school to refresh his knowledge about inflation, deflation, disinflation, and everything in between. While conditions have stabilized, prices remain elevated, leaving household budgets underwater.
A new trend may be gradually happening: The US economy could be slipping into deflation.
Before we dive into the nitty-gritty of economic data, it is vital to define these terms. When the rate of price inflation is 0%, it does not mean consumer costs are zero. Instead, it means that overall price levels, whether measured by the consumer price index (CPI) or the personal consumption expenditures (PCE) price index, have stopped rising.
So, the cumulative 22% Biden-era inflation bomb reset dollars and cents in the marketplace. Russia’s invasion of Ukraine and the COVID pandemic produced one-time price hikes, while the Federal Reserve’s increase in the money supply and Washington’s fiscal stimulus permanently embedded inflation in America.
Looking ahead, the United States could be embarking upon a period of low inflation or a sustained decline in the aggregate price level, also known as deflation. This prognostication began when Wall Street investor Cathie Wood indicated that the CPI could be “on its way to negative territory.”
This forecast referenced the widely watched Truflation US CPI Inflation Index, a real-time running estimate based on millions of economic data points. At the time of Wood’s Jan. 22 post on X, it was at 1.2%. As of Feb. 2, the index stood at 0.95%.
By comparison, however, government statistics suggest inflation is firmly above the Federal Reserve’s 2% target. The annual inflation rate, according to the Bureau of Labor Statistics, is 2.7%.
Both measure inflation, yet they show a vast difference. Why? Perhaps it is a lag effect (monthly versus daily). Maybe it is the ingenuity of the private sector (updated data feeds). Or it could be distinct models (market rents versus Owners’ Equivalent Rent).
Shoppers may feel skeptical, and economic observers might furrow their brows. Each behavior is warranted, especially looking at the Fed’s money supply, which reached an all-time high of $22.411 trillion in December, climbing more than 4% in all of 2025. But during the second half of the year, the money supply rose less than 2% (consumer price inflation rose roughly 1.4% during the same span).
Economists often discuss the lag effect of the central bank’s printing press, as it takes time to work its way through the broader economy and may affect certain sectors more than others. In other words, according to 18th-century economist Richard Cantillon, money creation is not created equal. If Fed Chair Jerome Powell is slowing the pace of money creation, and his potential successor Kevin Warsh shuts it down entirely, this could help ease inflationary pressures.
Deflation Is Not Bad
Econ 101 will say that while consumers undoubtedly desire lower prices, the trend is not good for the economy because it will reduce demand for goods and services. This is being played out in China, for example. However, US economic history is filled with examples of price deflation breeding growth and prosperity, including in the 19th century.
