An inflation report on Friday showed a slowdown in consumer price growth that in normal times would spark concern about the possibility of deflation, a scenario that would further imperil the U.S. economy as it grapples with the worst pandemic in more than a century.
But, of course, these aren’t normal times. Here’s why most economists aren’t adding deflation to their worry list:
The consumer price index fell 0.4% from the prior month, the largest monthly decline since January 2015, and rose 1.5% from a year earlier, the slowest annual pace since 2016, according to the Bureau of Labor Statistics. It was led by a collapse in oil prices stemming from a global drop in demand as nations battled the spread of COVID-19, along with some moves in early March by Russian President Vladimir Putin to disrupt oil markets.
Another reason the index was down was falling hotel prices – no one needs an explanation of why those room costs tumbled.
The data widely known among economists as the Federal Reserve’s preferred gauge of inflation showed a different story. The core index, which excludes volatile energy and food prices, was down 0.1% from the prior month – the first drop since 2010 – and up 2.1% from a year earlier.
That annual core index number is near – and even slightly above – the Fed’s 2% inflation target rate it believes will keep the economy stable.
“This is our first glimpse of how prices are faring in the social-distancing environment,” Wells Fargo economists said in a report. “At a high level, many of the underlying price components have behaved as expected.”
The inflation numbers also reflect data-gathering issues stemming from the stay-at-home orders issued by state governors and the subsequent closure of stores, the Wells Fargo economists said. The BLS suspended in-person data collection, which is how about 65% of the price numbers are gathered, on March 16.
Some of the numbers in the report are imputed, meaning they’re based on educated guesses.
Store closures “meant some prices were temporarily unavailable or imputed by the BLS,” the Wells Fargo report said. “As shutdowns continue into the second week of April, data collection will continue to be at risk until social-distancing measures are lifted.”
So, until it’s safe for consumers to come out of their homes and retail businesses begin reopening, it’s better to focus on long-term trends, the economists said.
“These data-collection difficulties may cause choppy data in coming months, making it increasingly important to focus on the trend, rather than the month-to-month movements in prices,” the Wells Fargo report said.