QnD: US Disinflation

Unsurprisingly, US Inflation data continues to come out very weak. Below is the actual data, with the basket breakdown, that shows a drop in headline and Core inflation rates. 26% of the basket is now in deflation. Food and recreational services are bucking the disinflationary trend, but food inflation is a temporary phenomenon - it mean reverts.

Naturally the collapse in oil prices (pre covid) continues to drag the headline CPI rate lower - from next month energy base effects should put upward pressure on the headline rate.

The real issue is the core rate. For the third month in a row it has done something that has only happened 7 times since 1970 - the CORE month on month rate of inflation has been negative. This shows how consumer shocks bring disinflation (whilst supply shocks bring inflation).

Looking at the driver of the core disinflation, chart below shows that not only is Choice inflation already at 0% (unsurprising consumer shock), but Burden inflation is falling, predominantly due to Transport Services (energy impact) and recent falls in Shelter (although this month was flat).

All in all, the consumer spending drop is leading the disinflation, helped obviously by the 12 month change in oil prices. This will take time to turn (core inflation changes direction as fast as an oil tanker!), which allows the Fed to use this data (as well as the unemployment data) to justify very loose monetary policy.