You can best appreciate what's going on with prices by disaggregating the personal consumption deflator into two of its three components: services (a good proxy for labor costs) and durable goods:
Even though the prices of many essential goods have fallen enormously and our living standards have increased, in a technical sense—assuming it's actually possible to estimate just how much more value for our money we're getting when we buy durable goods these days—prices on average have been rising. The first chart above shows inflation according to the overall personal consumption deflator (whose components include services, nondurable, and durable goods) and the core personal consumption deflator (which excludes food and energy). The second chart breaks out the rate of inflation in services and durable goods. The past 20 years have seen service sector prices rise by 2.5% and durable goods fall by an annualized 2% per year. Nondurable goods (e.g., commodities) prices have risen by an annualized 2.0% over the same period. Overall, prices have risen an annualized 1.8% over the past 20 years.
To understand durable goods deflation, consider the iPhone, which was first released about 7 ½ years ago. Although the price of an iPhone hasn't changed much over the years, its capabilities have multiplied. Before the iPhone, portable phones were largely just that: portable phones. The first iPhone showed us that phones could also be computers and simple cameras. Today, the iPhone produces full-length, high-definition movies and breathtaking photos; it's a 64-bit supercomputer that fits in your pocket; it monitors your health; it pays your bills with the touch of your thumb; it gives you directions to any place in the world, and the best route to avoid traffic; it holds your entire music and photo collection; it is a trading platform for stocks and bonds; it's a real-time news ticker; it accesses the world's knowledge base in seconds; it takes dictation; it's a video arcade and a movie theater; it communicates with anyone in the world in seconds; it can hold a library of books; and it can diagnose illnesses, to name just a few of its hundreds of thousands of applications for this miraculous gadget. For a mere $650, the iPhone saves you tens or even hundreds of thousands of dollars. Meanwhile, smartphones have spawned new industries (app developers), disrupted others (taxis), and are revolutionizing many others.
One more example: As the chart above shows, the cost of personal computers and peripherals has fallen by more than 95% since the BLS first started tracking them in 1998. That's taking into account, of course, all the extra value (faster speeds, more capabilities, more memory) that, say, $1000 buys today vs. 15 years ago. And by the way, despite two decades of falling prices, the computer industry has thrived. Deflation is not necessarily a death knell for anyone.
It may be hard to understand, but it's good news for just about everyone.