The coronavirus lockdown has pummelled the US economy, with some 30m jobs destroyed and trillions of dollars of output and wealth lost. Compounding the havoc is an economic malady that has gone unnoticed: one of the most severe deflations in modern history. Unlike coronavirus, it shows no signs of abating.
Prices are tumbling. The March personal consumption expenditures gauge fell at a 7.5 per cent annual rate, while the Consumer Price Index in April fell by more than in any month since December 2008. More worrisome is the trend in commodity prices, the best day-to-day indicator of inflation. We are now seeing a downward price spiral. We know that oil prices have plummeted this year, reflecting a rapid fall in global demand, but the shortage of global dollar liquidity is adding to the industry’s pain. Virtually all commodities are seeing declines. The leading commodity price index, the CRB, is down a third since January.
Or look at the yields on Treasury bonds and Tips (Treasury Inflation-Protected Securities). Louis Woodhill, a senior fellow at the Committee to Unleash Prosperity, notes that the US Federal Reserve’s “target PCE inflation rate is 2 per cent, and the market is betting that PCE inflation will average barely over half that rate (1.1 per cent) for the next 30 years!” Both Mr Woodhill and I have been warning of the damage from falling prices for many months. Our deflation diagnosis may seem surprising because Congress has added some $3tn to the debt and the Fed has injected at least $2.1tn of dollar liquidity into the economy. The central bank has also cut interest rates close to zero. These actions are normally associated with rising, not falling prices.