The Latest CPI Report: Prices Plummet Amidst Shutdown

By at 12 May, 2020, 11:36 am

by Raymond J. Keating-

Well, if you ever wondered what would happen to the general price level if large parts of the U.S. economy were shut down on purpose in a stunningly short time, the latest Consumer Price Index (CPI) report from the U.S. Bureau of Labor Statistics provides the answer.

After a decline of 0.4 percent in the CPI in March, the decline accelerated in April, with a drop of 0.8 percent. That was the biggest drop since December 2008.

Source: Federal Reserve Bank of St. Louis, FRED

It’s not surprising that when an unprecedented number of jobs simply evaporate due to government shutdowns in response to the COVID-19 pandemic, demand for a wide array of goods and services would plunge. In turn, prices naturally plummet.

As the BLS explained:

“A 20.6-percent decline in the gasoline index was the largest contributor to the monthly decrease in the seasonally adjusted all items index, but the indexes for apparel, motor vehicle insurance, airline fares, and lodging away from home all fell sharply as well. In contrast, food indexes rose in April, with the index for food at home posting its largest monthly increase since February 1974. The energy index declined mostly due to the decrease in the gasoline index, though some energy component indexes rose.”

Looking ahead, the market will make further adjustments, including as large parts of the economy carry on with the process of re-opening, and prices, of course, will continue to serve their central role of signaling where resources need to be allocated.

The larger question about the general price level lies further down the road, specifically, the question of inflation. It must be kept in mind that one of the worst scenarios to play out from a policy perspective would be for the Fed’s loose money default setting (since the late summer of 2008) to be combined with anti-growth tax, regulatory, government spending and trade policies. That would be an agenda for longer-run stagflation.

While the Fed continues to play a fantasy-like game on monetary policy, we have to continue to hope that market players effectively continue to counteract it, and at the same time, fiscal policy gets pointed in a pro-growth direction.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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