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The coronavirus pandemic pushed down April consumer prices by the most since the last recession as efforts to contain the virus disrupted demand for energy, travel, clothing and other goods and services.
The Labor Department said the consumer-price index fell by 0.8% last month, the second month in a row prices have eased since the pandemic reached the U.S. and the biggest drop since 2008. Business closures and stay-home orders aimed at containing the virus have created cheap oil, and falling prices for air travel, clothing, car insurance and other goods and services.
Excluding the volatile food and energy categories, so-called core prices decreased 0.4%, the largest monthly drop in records dating to 1957. While the month-to-month drops in inflation notched records, annual prices only reached the lows of the last expansion. Overall prices were up 0.3% from a year earlier, the lowest since 2015, and core prices were 1.4% higher from a year ago, the lowest since 2011.
Economists expect the decline in prices to be short-lived, with costs firming up as the U.S. reopens its economy and demand increases. Most don’t think the U.S. is likely to see price softness turn into a worst-case scenario as an extended period of deflation—when there are so many idle economic resources that businesses and workers are forced to lower prices and wages to generate demand for their goods and services.
“With economic activity beginning to open up, even if in a halting manner, while prices may slip further, they are unlikely to do so to nearly the extent seen in April,” said Richard Moody, chief economist at Regions Financial Corp.
A weak economy and softening inflation has had some investors betting the Federal Reserve will turn to negative interest rates to help boost growth. But some central bank research shows negative rates, adopted in other countries, have pushed inflation expectations lower, and Fed officials have concluded the tool’s costs outweigh uncertain benefits.
The Fed’s preferred inflation gauge is the personal-consumption expenditures price index, which has tended to run a little cooler than the CPI. The two generally move in the same direction, though measurement differences might produce a larger difference than usual now.
Lately, energy prices are the biggest drag on both. The Labor Department’s index for gasoline prices tumbled 20.6% in April from the prior month.
As recently as January, a barrel of U.S. oil cost more than $60. On April 20, U.S. crude futures for delivery the following month fell below $0 a barrel for the first time in oil market history. The coronavirus killed demand for fuel. A price war between Saudi Arabia and Russia alongside broad overproduction added to the oil glut.
One area where the pandemic is pushing prices higher: food.
The price index for food at home posted its largest monthly increase since February 1974. Americans stocked up at the pandemic’s outset. Since then, outbreaks have forced meat-processing plants to close and otherwise snarled supply chains. The April price index for meats, poultry, fish and eggs increased 4.3% from a month earlier.
Fed officials will look past oil markets and food costs to focus more on core prices. At least for now, coronavirus-related developments are pushing those lower. Indexes for apparel, auto insurance and airfares all posted their largest monthly declines on record.
“The fallout from the coronavirus has a large disinflationary effect on prices due to the large demand shock, plunge in oil prices, and strong dollar,” said Kathy Bostjancic, an economist at Oxford Economics. “A surge in inflation is the least of our worries.”
One reason deflation may not become an issue is government action to limit the impact of the virus’s disruption. The Fed and U.S. Treasury are pumping trillions of dollars into the economy, and many economists expect a sharp, short recession followed by a slow recovery.
A New York Fed survey out Monday found consumer inflation expectations for the next year and three years increased slightly—both now stand at 2.6%. “Respondents, however, increasingly disagree about the future path of inflation,” the survey said.
The market outlook appears less anchored. Yield movements in the Treasury inflation-protected securities, or TIPS, market show that compensation for inflation expected in five years, after the temporary impact of lower oil prices has faded, fell sharply in March before rebounding slightly, albeit at historically low levels.
Fed officials believe that consumer and market expectations for inflation affect behavior, becoming almost a self-fulfilling prophecy.
Another, longer-term concern is that large amounts of government borrowing and rising costs of doing business could push inflation uncomfortably high. Low rates and government deficits spurred consumer-price inflation after World War II and during the 1970s.
But with the loss of 20.5 million jobs and unemployment hitting a post-World War II high in April, the focus is more immediately on building a fiscal and monetary bridge until the coronavirus is contained.
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“In the near term it’s more likely, we think here at the Dallas Fed, we’ll have disinflation,” Dallas Fed President Robert Kaplan said earlier this month. “That’ll be in the shorter run, the next year or two. I do worry about, as we get back over the next few years to full capacity, with some of this stimulus and the size of the Fed’s balance sheet, do we start creating inflationary pressures? But that’s not going to be for two or three years.”