• Edward Ballsdon

QnD : US Disinflation


Quick and Dirty : US Disinflation accelerated in April.


A negative core print occurred for only the 6th time since 1970 (and for a second month running). Covid19 is deeply disinflationary for the CPI basket, and it's hard to see a turnaround as long as the government prevents a deep supply shock.


DATA

April20 CPI saw a significant drop in headline CPI to 0.3% year on year (%yoy) due to the recent collapse in oil prices AND, more significantly, another further and very rare collapse in Core CPI to 1.4%yoy, its lowest level since April 2011.

A quarter of the basket is in outright deflation, predominantly due to the decline in energy prices (which is likely to mean revert upwards in 1 years time).

ENERGY

Energy Inflation (8% of the CPI basket) dropped again like a stone, and is likely to keep the Headline depressed until base effects pull it back positive in 1 year's time (assuming unchanged oil price).

CHOICE vs BURDEN INFLATION

Both dropped precipitously, with Choice back to deflation territory. The decline in the still higher Burden inflation was caused by the strong drop in Shelter inflation, which represents a significant 33% of the CPI basket. If the GFC is a guide, there is much further for this to drop in the months ahead, which would be a boost to real average wage earnings.


DATA IS EXCEPTIONAL

Last month's -0.1 % month on month CORE inflation print for March was only the fifth such negative occurrence since the 1970s, when the $ lost its peg to Gold (as I pointed out in last month's post). This month's -0.4%mom core inflation is the 6th.

Whilst this event has happened two months in a row before (Nov82 and Dec82), the size of the decline over the last two months is much larger. This can be clearly seen by the data vs the 10 year average %mom for March and April in the chart below.


CONCLUSION

The data clearly shows just how disinflationary the Covid19 pandemic is for the CPI basket. This is pretty well discounted by the Inflation Linked market which hardly budged on the data. Indeed, as discussed in a previous analysis of forward interest rates, the market is pretty well discounting the Japanification of US CPI with very low expectations for future inflation.


This of course has serious ramifications for corporate margins, profitability and debt repayment. As long as rates remain very low and the government allows for the evergreening of highly leveraged corporate loans, thereby preventing a supply shock, it's hard to see a rise in inflation in the near term. If anything, the risk is that a further decline in consumption brings a deeper bout of disinflation.



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