With Core Prices Also Down; Deflation, Not Inflation, Is The Threat
For Friday April 10, 2020 — Commentary from PNC Chief Economist Gus Faucher:
The consumer price index dropped 0.4 percent in March, the largest one-month decline in overall prices since late 2008, during the heart of the Great Recession. The decline was led by a 5.8 percent drop in energy prices over the month, including a 10.5 percent plunge in gasoline prices.
The core CPI, excluding volatile food and energy prices, fell 0.1 percent in March. This was the first drop of 0.1 percent (rounded) or more in core prices since 2010. There were big price declines over the month for new vehicles (-0.4 percent), apparel (-2.0 percent), and airfares (-12.6 percent).
On a year-ago basis overall CPI inflation was 1.5 percent in March, a sharp slowing from 2.3 percent inflation in February. Core year-over-year inflation slowed to 2.1 percent in March from 2.4 percent in February.
With much economic activity coming to a halt, the big concern right now is deflation-when prices are falling broadly in the economy are falling-rather than inflation, when prices are rising. Deflation can be a big problem during recessions as consumers and businesses hold off on purchases, waiting for lower prices and exacerbating the downturn. Deflation can also distort monetary policy (Federal Reserve interest rate policy), and the labor market, as it makes it more difficult for wages to adjust to slack in the job market. Deflation can also distort signals from stock and real estate prices.
Overall deflation is likely to take hold over the next few months as businesses slash prices in response to much lower demand from the coronavirus outbreak and associated restrictions on movement. Gasoline prices are already at their lowest levels in a couple of decades, although they may move somewhat higher after an agreement on production cuts from OPEC and Russia. Core prices may also see a few months of deflation in the near term. But inflation should resume once restrictions on movement are lifted and demand starts to improve later this year, and the U.S. should be able to avoid a deflationary spiral.
An additional problem is that it will be difficult to measure prices in the near term, as markets for many goods and services–such as air travel, movie admissions, and restaurant meals-have essentially disappeared. That may make readings on inflation or deflation less useful to policymakers in 2020.
