Deflationary Trends Are Growing More
Powerful
Powerful
The latest consumer price index report proves that the path
of least resistance for inflation is lower.
of least resistance for inflation is lower.
By Gary Shilling
October 13, 2020, 12:00 PM EDT
After nosediving from March through May as the
pandemic-sired lockdowns devastated U.S. household spending, consumer prices
rebounded in the following four months. Some fear this is the start of a
resurgence of inflation. The Federal Reserve Bank of New York’s survey of
consumer inflation expectations shows a jump from 2.4% to 3% for both one and
three years ahead.
pandemic-sired lockdowns devastated U.S. household spending, consumer prices
rebounded in the following four months. Some fear this is the start of a
resurgence of inflation. The Federal Reserve Bank of New York’s survey of
consumer inflation expectations shows a jump from 2.4% to 3% for both one and
three years ahead.
If you think serious inflation is coming, you don’t believe
in the fundamental power of excess
global supply to depress prices. With globalization, Western technology is
combined with cheap Asian labor to produce a vast array of goods and, increasingly,
services. But Asian consumers purchase only a fraction of what they produce. China’s
consumer spending is just 39% of gross domestic product, compared with 68%
in the U.S., resulting in a saving glut
that is highly deflationary.
in the fundamental power of excess
global supply to depress prices. With globalization, Western technology is
combined with cheap Asian labor to produce a vast array of goods and, increasingly,
services. But Asian consumers purchase only a fraction of what they produce. China’s
consumer spending is just 39% of gross domestic product, compared with 68%
in the U.S., resulting in a saving glut
that is highly deflationary.
This glut is unlikely to atrophy even if the U.S.-China
trade war intensifies. Western and even Asian companies such as Samsung,
Hasbro, Apple and Nintendo are shifting production from China to Vietnam,
Pakistan and other Asian countries that have even-lower costs and are out of
the trade war’s line of fire. It’s no surprise that the Federal Reserve, with
all its power, has not been able to push the inflation rate to its 2% target
and is admitting so by saying it will allow inflation to overshoot its target
for a period of time before tightening monetary policy. To be sure, the Fed
isn’t alone among central banks in failing to spark inflation to an acceptable
level.
trade war intensifies. Western and even Asian companies such as Samsung,
Hasbro, Apple and Nintendo are shifting production from China to Vietnam,
Pakistan and other Asian countries that have even-lower costs and are out of
the trade war’s line of fire. It’s no surprise that the Federal Reserve, with
all its power, has not been able to push the inflation rate to its 2% target
and is admitting so by saying it will allow inflation to overshoot its target
for a period of time before tightening monetary policy. To be sure, the Fed
isn’t alone among central banks in failing to spark inflation to an acceptable
level.
On a micro level, the pandemic has shown the power of supply
and demand to determine prices. With many still house-bound, the cost of food
at home in September was up 4.1% from a year earlier, but at nearly deserted
schools and workplaces, food costs fell 3.4%, according to the Bureau of Labor
Statistics.
and demand to determine prices. With many still house-bound, the cost of food
at home in September was up 4.1% from a year earlier, but at nearly deserted
schools and workplaces, food costs fell 3.4%, according to the Bureau of Labor
Statistics.
The differences in
inflation between stay-at-home and
out-and-about spending were widespread. The consumer costs of recreational
books rose 4.1% in September from a year earlier. Cable and satellite TV fees
rose 5.0%, newspapers cost 5.6% more, medical care was up 4.2%, cleaning
products prices climbed 4.5% and bicycle prices jumped 1.3%. Prices of things consumed away from home plunged, with
airline fees dropping 25.0%, men’s suit jackets and coat prices declining 18.7%
and women’s dress prices tumbling 16.8%, hotel room rates falling 15.0% and
city transportation costs cratering 16.5%.
inflation between stay-at-home and
out-and-about spending were widespread. The consumer costs of recreational
books rose 4.1% in September from a year earlier. Cable and satellite TV fees
rose 5.0%, newspapers cost 5.6% more, medical care was up 4.2%, cleaning
products prices climbed 4.5% and bicycle prices jumped 1.3%. Prices of things consumed away from home plunged, with
airline fees dropping 25.0%, men’s suit jackets and coat prices declining 18.7%
and women’s dress prices tumbling 16.8%, hotel room rates falling 15.0% and
city transportation costs cratering 16.5%.
Supply and demand forces are also revealed in slumping
energy prices. With people staying at home and not driving, commuting or
flying, demand for crude oil has slumped. West Texas Intermediate prices have
fallen from $58 per barrel at the beginning of the year to a recent $41 even
though U.S. frackers and conventional oil producers have cut output from 12
million barrels per day to 11 million. And that’s after the earlier drop from
$67 per barrel in early October 2018.
energy prices. With people staying at home and not driving, commuting or
flying, demand for crude oil has slumped. West Texas Intermediate prices have
fallen from $58 per barrel at the beginning of the year to a recent $41 even
though U.S. frackers and conventional oil producers have cut output from 12
million barrels per day to 11 million. And that’s after the earlier drop from
$67 per barrel in early October 2018.
The Consumer Price Index overstates inflation in a number of
ways, including its accounting for housing. The statistics assume that
homeowners rent their abodes from themselves, paying market rental rates. This
owner’s equivalent rent component is large, 24% of the CPI, and has risen
rapidly in recent years as rental costs jumped along with robust demand. Owner’s equivalent rent was up 2.5% in
September from a year earlier, but if you stripped that out, CPI edged up
just 0.8% instead of the reported 1.4%.
I doubt that many homeowners consider rent paid to themselves as part of
their cost of living.
ways, including its accounting for housing. The statistics assume that
homeowners rent their abodes from themselves, paying market rental rates. This
owner’s equivalent rent component is large, 24% of the CPI, and has risen
rapidly in recent years as rental costs jumped along with robust demand. Owner’s equivalent rent was up 2.5% in
September from a year earlier, but if you stripped that out, CPI edged up
just 0.8% instead of the reported 1.4%.
I doubt that many homeowners consider rent paid to themselves as part of
their cost of living.
President Donald Trump’s executive order to reduce
prescription drug costs for Medicare recipients to what pharmaceutical
companies charge in other countries is highly deflationary. In the past,
Americans have essentially paid the cost of developing new drugs when foreign
governments buy them closer to marginal costs. Specialty branded drug costs in
the U.S. are up 62% since January 2014, compared with the 10% rise in overall
CPI. At the same time, generic drug costs for Americans have dropped 37%. With
the chronic rise in branded pharmaceutical prices, total drugs, 1.5% of the
CPI, are up 14% since January 2014.
prescription drug costs for Medicare recipients to what pharmaceutical
companies charge in other countries is highly deflationary. In the past,
Americans have essentially paid the cost of developing new drugs when foreign
governments buy them closer to marginal costs. Specialty branded drug costs in
the U.S. are up 62% since January 2014, compared with the 10% rise in overall
CPI. At the same time, generic drug costs for Americans have dropped 37%. With
the chronic rise in branded pharmaceutical prices, total drugs, 1.5% of the
CPI, are up 14% since January 2014.
Price spikes due to the emerging coronavirus crisis in the
spring are being retraced as production and supply chains adjust.
Slaughterhouse closings due to infected plant workers failed to stop animals
from growing and adding weight. So now chicken wings and prime rib are abundant
and cheaper than before the pandemic commenced.
spring are being retraced as production and supply chains adjust.
Slaughterhouse closings due to infected plant workers failed to stop animals
from growing and adding weight. So now chicken wings and prime rib are abundant
and cheaper than before the pandemic commenced.
Trump’s contraction of Covid-19 has brought home the
persistence of the pandemic and the deflation-spawning weak economic growth
that lies ahead. So does the deteriorating household income and employment
picture. Personal income dropped 2.7% in
August as the extra unemployment insurance benefits expired, and despite
the looming election, Washington is yet to pump more money into households.
persistence of the pandemic and the deflation-spawning weak economic growth
that lies ahead. So does the deteriorating household income and employment
picture. Personal income dropped 2.7% in
August as the extra unemployment insurance benefits expired, and despite
the looming election, Washington is yet to pump more money into households.
Although the unemployment rate fell to 7.9% in September
from 8.4% in August, that’s mainly due to
temporary layoffs that became permanent as employers abandoned hopes for
a quick recovery. Walt Disney Co. is axing 28,000 theme park workers who
previously were on temporary furlough, and American Airlines and United
Airlines are terminating 32,000. In April, 88% of those who lost jobs reported
their layoffs were temporary, but only 51% thought so in September, according
to the Labor Department. Those reporting permanent job losses jumped from 2
million in April to 3.8 million in September.
from 8.4% in August, that’s mainly due to
temporary layoffs that became permanent as employers abandoned hopes for
a quick recovery. Walt Disney Co. is axing 28,000 theme park workers who
previously were on temporary furlough, and American Airlines and United
Airlines are terminating 32,000. In April, 88% of those who lost jobs reported
their layoffs were temporary, but only 51% thought so in September, according
to the Labor Department. Those reporting permanent job losses jumped from 2
million in April to 3.8 million in September.
As the pandemic-sired recession persists into 2021,
even-lower inflation if not deflation looms. That would be accompanied by
even-lower yields on U.S. Treasury securities. Commodity prices, not just
crude oil, would fall. Online retailers would continue to benefit from
stay-at-home consumers but the pressure on shopping malls would intensify. Many
more heavily-leveraged retailers and others with huge debt service would fold.
even-lower inflation if not deflation looms. That would be accompanied by
even-lower yields on U.S. Treasury securities. Commodity prices, not just
crude oil, would fall. Online retailers would continue to benefit from
stay-at-home consumers but the pressure on shopping malls would intensify. Many
more heavily-leveraged retailers and others with huge debt service would fold.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Gary Shilling at agshilling@bloomberg.net
To contact the editor responsible for this story:
Robert Burgess at bburgess@bloomberg.net
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