CPI posts its largest decline since December 2008

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Low inflation, which has concerned the Federal Reserve for years, fell more last month as the coronavirus-related shutdown continues to batter the economy, and will pressure the central bank.

Consumer goods prices dropped a seasonally adjusted 0.8% in April, its largest monthly decline since December 2008, according to the Labor Department.

In March, CPI dropped 0.4%. Economists surveyed by IFR Markets expected CPI to fall 0.7% in the month. The core rate declined 0.4% in April, its biggest drop ever, after a 0.1% dip a month earlier. Economists expected a 0.2$ decline.

“Today’s data confirm Federal Reserve concerns that inflation will further decelerate in response to COVID-19,” said Diane Swonk, chief economist at Grant Thornton. “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 and 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.”

The headline CPI is up just 0.3% in the past 12 months, compared to a 1.5% rise a month earlier. Excluding food and energy, CPI was up 1.4% in the past 12 months, down from 2.1% a month prior. Economists expected a 0.4% rise in the headline and 1.7% in the core year-over-year.

The year-over-year CPI rise was the smallest since October 2015, while the core's gain was its smallest since April 2011.

“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,” said Swonk. “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 indexes for rent, owners’ equivalent rent, medical care, and household furnishings and operations all increased in April.

The energy index fell 17.7% in the past year, while the food index soared 3.5% in that period, its largest 12-month increase since February 2012.

In a virtual meeting after the numbers were released, but not responding to them, Federal Reserve Bank of Minneapolis President Neel Kashkari, noted, "Spending more than you're producing leads to inflation and we [as a country] can manage and pay off the debts, because the borrowing costs are still relatively low."

Investors know the U.S. will pay its debts, he said, "which is why we can borrow at such cheap levels."

Inflation is more likely to be low, than high over the next five years, he said, but added, inflation is all relative."

"We have the strongest economy in the world right now but that won’t always necessarily be the case," he said. "We need to improve for the long-run and during that process, inflation will take care of itself. Congress is doing what it can do to help the American people and after COVID-19, we need to get our debt house in order."

As most other Fed officials have, Kashkari dismissed the possibility the Fed will drop its fed funds rate target below zero. "I would never say never but it has been pretty unanimous that we do not think moving rates into negative territory is likely,” he said. “We have other tools that are more powerful and we would want to try those first before we try [negative rates].”

However, Nigel Green, CEO and founder of the deVere Group, thinks otherwise.

“Negative interest rates are coming and investors will now be looking to bolster their portfolios to get ahead of the curve and build wealth,” he said. Rate options, which gauge monetary policy forecasts, this week implied a 23% likelihood the federal funds rate will drop below zero by the end of the year, according to BofA Securities data.

“It’s not just the U.S." that could go negative, Green said, "the Deputy Governor of the Bank of England also suggested that the United Kingdom may be headed toward negative interest rates.”

Months ago, negative interest rates would be unthinkable, he said, but the COVID-19 crisis has changed everything.

“As central banks around the world grapple to control the economic impact, it can be reasonably expected that more and more of them will take a dramatic change of policy course and take rates to below zero — like their peers in Europe and Japan,” Green said. “There is legitimate debate about the efficacy of negative interest rates on boosting economies.”

Federal Reserve Bank of Philadelphia President Patrick Harker said the Fed expects to keep rates near zero "for some time."

"The second quarter data will be brutally painful as a result of both the virus and the government-mandated economic shutdown," he said. "Take your pick of bad, really bad, or really, really bad."

And "how the virus moves through our society, and our reaction to it in terms of balancing stay-at-home policies versus an intelligent — and I want to stress, intelligent — reopening" will determine how fast the economy will recover, Harker said.

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Economic indicators Inflation Federal Reserve Bank of Minneapolis Federal Reserve Bank of Philadelphia Interest rates Monetary policy Neel Kashkari Patrick Harker