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Home > Coronavirus > April U.S. Consumer Price Index: Another whiff of pandemic-caused deflation

April U.S. Consumer Price Index: Another whiff of pandemic-caused deflation

May. 12, 2020 by Joseph Brusuelas

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This is what demand destruction looks like. The 0.8% decline in the Consumer Price Index in April, announced on Tuesday, should serve as a cautionary tale to those espousing dead dogma around risks to the outlook linked to inflation.

The U.S. economy is absorbing a significant demand shock, and April’s decline in consumer prices is a preview of things to come. While it will take some time before the decline in oil and gasoline prices work their way through to the year-over-year core metric, risks to the economy and household consumption are going to be skewed toward deflation for the foreseeable future.

This pricing data, and that to arrive in the coming months, should underscore efforts at the Federal Reserve to put a floor under the financial sector and the real economy to mitigate the shocks that are still cascading through the domestic economy.

The data should underscore efforts at the Federal Reserve to put a floor under the financial sector and the real economy.

Inflation will not, and should not, be the primary aim of policy. Deflation, defending price stability around the zero lower boundary, market-derived nominal negative interest rates, rising unemployment and dollar appreciation — all of which will push prices down — will be.

The data strongly reflects the demand shock affecting the economy. Energy prices declined 10.1%, gasoline fell 20.6%, while apparel and transportation prices dropped 4.7%, all on a month-over-month basis. Public transportation was down 8.1% while airline fares dropped 14.8%.

On a year-ago basis, energy prices declined 17.7%, apparel 5.7% and transportation 9.5%. Food prices increased 1.5%. Commodity prices declined 1.6%, with commodity prices excluding food and beverages down 3.5%.

Core CPI was down 0.4% month over month and was up 1.4% on a year-ago basis.

Our core preferred year-over-year CPI metrics, CPI excluding food and energy, declined from 2.1% in March to 1.4% in April, while CPI services excluding rent and energy dropped from 2.53% to 1.79% in April.

Given the likely move in the U.S. unemployment rate above 20% and the total number of unemployed surpassing 40 million in the near term, it is difficult to square calls for inflation or any near-term rebound in the Consumer Price Index or the policy-sensitive Personal Consumption Expenditures Price Index.

Deflation is going to be part of the economic narrative and policy picture over the next two to three years at a minimum.

In our estimation, the pricing on the two-year Treasury is signaling that investors expect negative nominal rates soon, which would imply that the bond market is acutely sensitive to risks to the economic outlook linked to deflation. My sense is that the bond market is not pricing in negative interest rate policy by the Fed. Rather, rising risks of negative nominal interest rates derived by market pricing are linked to an economic outlook that is defined by demand destruction, elevated unemployment and an elongated economic recovery that will look far more like a Nike swoosh than a V envisioned by some policymakers.

For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.

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Filed Under: Coronavirus, Economics Tagged With: Consumer Price Index, coronavirus, Covid-19, CPI, Joseph Brusuelas

About Joseph Brusuelas

@JoeBrusuelas

Joe Brusuelas, “chief economist to the middle market,” is the preeminent voice championing issues and policies facing midsize companies in the United States and around the world. An award-winning economist, Brusuelas has more than 20 years’ experience analyzing U.S. monetary policy, labor markets, fiscal policy, international finance, economic indicators and the condition of the U.S. consumer.

A member of the Wall Street Journal’s forecasting panel, Brusuelas regularly briefs members of Congress and other senior officials regarding the impacts of federal policy on the middle market and the factors by which middle market executives make business decisions. He also frequently offers his insights on the U.S., Canadian and global economies in the financial media. In 2020, he was named one of the 100 most influential economists by Richtopia.

Before joining RSM in 2014, Brusuelas spent four years as a senior economist at Bloomberg L.P. and the Bloomberg Briefs newsletter group, where he co-founded the award-winning Bloomberg Economic Brief. Earlier in his career, he was a director at Moody's Analytics covering the U.S. and global economies for the Dismal Scientist website. He also served as chief economist at Merk Investments L.L.C. and chief U.S. economist at IDEAglobal.

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