Wednesday, May 13, 2020
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A novel virus creates novel economic concerns.
As the U.S. economy continues to reel from shutdowns related to the coronavirus pandemic, the oldest worry in the economics world has begun to rear its head — should we be worried about inflation?
The data suggests no. On Tuesday, we learned the largest-ever monthly drop in consumer prices was recorded in April. And as Gregory Daco, chief U.S. economist at Oxford Economics said Tuesday, “A surge in inflation is the least of our worries.”
Instead, it is disinflation that has now taken hold in the U.S. economy.
Disinflation is most simply defined as a lack of either inflation or deflation. To some, this might sound like a dream consumer scenario: nothing changes.
For the Federal Reserve, disinflation is a bit too close to deflation for their liking. And this scenario bolsters the case for the central bank keeping its unprecedented expansion of monetary policy in place for some time.
“If required, the Federal Reserve can go bigger, or longer, in the execution of its programs, and we think the central bank will fight hard against any persistence in this disinflationary impulse,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income, in an email on Tuesday.
The Federal Reserve currently targets 2% inflation and its preferred measure, core PCE, hasn’t been above 2% for more than a few months at a time since the financial crisis. As strategist Peter Tchir said back in 2015, the Fed targeting 2% inflation is like asking the shortest kid on a basketball team to dunk.
But as much as economists worry about price inflation, so too does deflation keep them up at night. A deflationary spiral — in which purchases of goods and services are delayed in expectation of ever-lower prices — is a central banker’s nightmare.
As Narayana Kocherlakota, then of the Minneapolis Fed, said at a 2010 FOMC meeting, “A much more difficult problem, is the situation where deflationary expectations start to become hardened — a deflationary trap... My own assessment of the literature and my own thinking about this lead me to believe that we, the monetary policymakers, have very limited tools at our disposal in this situation.”
Michael Pearce, senior U.S. economist at Capital Economics, said Tuesday that April’s consumer price data is “not indicative of a broader deflation.”
But RSM’s chief economist Joe Brusuelas said Tuesday that, “risks to the economy and household consumption are going to be skewed toward deflation for the foreseeable future.”
Brusuelas added that “deflation is going to be part of the economic narrative and policy picture over the next two to three years at a minimum.” A demand shock of this magnitude, in Brusuelas’ view, is not likely to be inflated away by expansionary fiscal or monetary policy.
When tens of millions of people lose their jobs in a matter of weeks, almost no amount of assistance is likely to change the outlook for their finances.
Rieder does note, however, that the market’s current positioning prices the chances of inflation next year at effectively zero is “unrealistic and excessively pessimistic.”
A re-opened economy, even one operating below full strength, combined with oil prices lapping the biggest energy shock on record, should create some modest pricing pressure next year.
Something that would be a welcome development to central bankers trying to hold the line on falling prices across the economic landscape.
What to watch today
7 a.m. ET: MBA Mortgage Application, week ending May 8 (+0.1% prior)
8:30 a.m. ET: PPI Final Demand month-on-month, April (-0.4% expected, -0.2% in March); PPI excluding Food & Energy month-on-month, April (-0.1% expected, +0.2% in March)
8:30 a.m. ET: PPI Final Demand year-on-year, April (-0.2% expected, +0.7% in March); PPI excluding Food & Energy year-on-year, April (+0.8% expected, +1.4% prior)
4 p.m. ET: SmileDirectClub (SDC) is expected to report a loss of 22 cents per share on $218.13 million in revenue
4:05 p.m. ET: Cisco (CSCO) is expected to report adjusted earnings of 71 cents per share on $11.88 billion in revenue
Other notable reports: Jack in the Box (JACK)
UK economy saw worst slump since 2008 even before full lockdown blow [Yahoo Finance UK]
Uber may buy Grubhub and it may be perfect timing [Yahoo Finance]