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August 25, 2020 00:23 GMT
MNI EXCLUSIVE: Surprise Inflation Gain to Fade -Fed Economists
WASHINGTON (MNI)
The surprisingly quick recovery in U.S. consumer inflation won't last as high unemployment and the demand shock from Covid-19 return as major drags, Federal Reserve economists told MNI, with one anticipating deflation by January.
Headline and core CPI both showed the largest rise in nearly three decades in July, while Fed gauges of underlying inflation rose the most since the 2008 energy price spike. Inflation quickened to 1.0% and core to 1.6%, still far below the Fed's 2% target but much stronger than market expectations for a sluggish Covid recovery.
Fed economists, citing details of the CPI report, local business surveys and their own models, say the evidence is weighed against any real push higher in prices over the medium term.
"Most of that can be explained by one-time increases," Robert Rich, director of the Cleveland Fed's Center for Inflation Research, said in an interview. "It doesn't look like momentum will be sustainable." Overall, "we still have pressures that are disinflationary, and another concern going forward is the fiscal relief and whether that will support things," as Republicans and Democrats stand at an impasse on stimulus talks.
CHEAPER RENT
Cleveland Fed economist Randal Verbrugge, in a newly updated working paper on the Phillips Curve relationship between inflation and unemployment, forecasts negative Trimmed Mean PCE inflation by January with prices weighed down by the 30 million workers now collecting unemployment benefits.
"I expect big disinflationary pressures," he told MNI. "I'm in the minority, I have to admit. Most outside forecasters do not expect inflation to get that low, but that's where I believe it's heading."
Slowing gains in rental rates, the biggest component of service sector inflation, is "a big part of the story," Verbrugge said, though his paper does not disentangle the specific factors driving its result. Owners' equivalent rent rose 0.2% in July after gaining 0.1% a month earlier, the smallest increase in seven years.
Even that understates the heavy downward pressure coming in rents. The BLS collects fresh data only every six months on the average rents for a building, not the price of new rentals, Verbrugge noted. Some tenants have also entered into forbearance agreements, which aren't typically fully reported to the BLS.
BEYOND NORMAL
Big reversals in categories like motor vehicle insurance, used cars and airfare that saw huge declines when businesses were shut this spring also accounted for much of last month's strength in CPI.
Those weren't the only standout categories. More than half of overall CPI, by expenditure weight, posted price changes outside of the "normal" 0% to 5% range last month, said Atlanta Fed policy adviser Brent Meyer.
Interpreting headline and core rates is also more difficult because the pandemic caused big swings in spending patterns -- stockpiling food while shunning cruise ship vacations, for example. Whereas the PCE inflation basket can be responsive to those shifts, CPI basket weights are fixed.
"It makes the job of attempting to gauge where underlying inflation is difficult," Meyer said.
Evidence points to sluggish demand as the driving factor from here, Meyer said. Early in the pandemic, a typical firm surveyed by the Fed bank expected the virus to be a temporary phenomenon lasting four to five months. By July, expectations of the disruption had lengthened to 11 months with some saying two years or more.
"That really speaks to a notion that there will be continuing disruption and impact to operations and demand going forward for some time," he said.
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com
To read the full story
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Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
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