COVID-19 Freeze Saps Inflation

The consumer price index (CPI) fell 0.8% in April, the fastest drop since December 2008 when the Global Financial Crisis was wreaking its carnage on the economy. Gasoline prices alone fell by more than 20% during the month, the fastest pace since November 2008 as a sharp drop in demand coupled with an oil price war between Saudi Arabia and Russia raged. We also saw large declines in prices for apparel, airfares, hotels and used cars and trucks, which is not surprising given these sectors were hit hardest by lockdowns across the nation. Travel and tourism screeched to a halt during the month. With the reopening of state economies in May, travel is just beginning to post gains off of a very deep bottom.

The one thing we all need - food at grocery stores - saw a large spike in prices. A surge in meat and pork prices were the biggest contributors to those gains as meat processing plants were forced to close after a surge in COVID-19 infections. Close to 5,000 infections were reported in plants in 19 states by the end of April. Many farmers struggled as the fall in demand from restaurants forced them to let crops rot in their fields and dairy producers to literally pour milk down drains. That led to supply shortages, which pushed up prices at grocery stores across a broad spectrum of food categories at the worst possible time. Delays in unemployment insurance left many unable to pay for the most basic of needs for their families during the month: food and shelter.

The index for food away from home rose 0.1%. The index for limited-service meals - largely drive-through, fast-food restaurants - rose 0.7%, likely reflecting the higher costs of meat and increased demand for cheap takeaway. The index for full-service meals dropped 0.3% as restaurants that stayed open struggled to provide curbside pickup and delivery services. I know some local restaurants that scrambled to get websites with a scaled-back menu in place to service regular clients as the country moved to shut down in March. Some restaurants in my neighborhood attempted to band together to make it easier for curbside pickup. One was closed not long after the shift because of a COVID-19 outbreak in its tiny kitchen.

The core (excluding food and energy) CPI fell 0.4%, the largest monthly decline in history. Price declines on a monthly basis were widespread with the exception of medical care services, which was driven by a sharp increase in hospital costs. Education, household furnishing and alcoholic beverage costs also rose. Education is likely to suffer a blow from college students pushing back against the cost and efficacy of hastily assembled online courses. Lawsuits against higher education have accelerated. The rise in the cost of alcohol seems to track demand. It is one area that increased along with food at grocery stores. The stress of the pandemic is causing people to self-medicate.

The CPI rose only 0.3% from a year ago, the weakest year on year increase since October 2015, the last time oil prices plummeted. Prices at the gas pump alone fell more than 30% from a year ago. Airfares and apparel were also down dramatically from a year ago. We should see some firming in airfares as customers return, but the volume of activity is expected to be suppressed for some time to come. Further complicating airfares will be the need to preserve social distancing, meaning that the air carriers will have to fly at less than full capacity, which will push up prices a bit over the summer.

The core CPI rose 1.4% from a year ago, the weakest since April 2011. Risks of a further downdraft in core inflation outweigh the near-term risks of a flare-up. We are seeing supply shocks given the hurdles we face to reopening and reemploying large portions of the population.

Bottom Line
Today’s data confirm Federal Reserve concerns that inflation will further decelerate in response to COVID-19. This will be one of many reasons the Fed feels pressure to do more rather than less over the summer. Fed Chairman Jay Powell is scheduled to speak on Wednesday; he is expected to underscore the Fed’s concerns about the weakness tied to COVID-19 and underscore the need for Congress to do more to blunt the blow that COVID-19 is having on the broader economy.

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