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Falling producer price index fans fears of deflation

Mitchell Hartman May 13, 2020
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A warehouse in China. Producer prices have softened as economic activity has slowed. Wang He/Getty Images
COVID-19

Falling producer price index fans fears of deflation

Mitchell Hartman May 13, 2020
Heard on:
A warehouse in China. Producer prices have softened as economic activity has slowed. Wang He/Getty Images
HTML EMBED:
COPY

There’s more evidence Wednesday of the extreme weirdness and volatility of this economy — an economy that’s under the influence of COVID-19 right now.

A key measure of inflation, the producer price index, fell 1.3% in April. This is wholesale prices — the prices grocery chains and places like Amazon pay to stock their shelves with goods they sell to us, the prices hospitals pay to supply their ICUs. 

This inflation measure fell the most since 2009, when the Bureau of Labor Statistics started tracking producer prices at the peak of the Great Recession. And it comes on top of Tuesday’s report that consumer prices fell in April too, by 0.8%.

When prices keep falling, that’s deflation, not a nice word for economists.

Now, not everything is going down in price. 

If you’re selling masks or hospital gowns, you can charge top dollar these days. Ditto anything that’s flying off the grocery shelves.

But for most items — from clothes to cigarettes to used cars — prices are going down. 

“This is the very definition of a fire-sale situation,” said Jacob Kirkegaard, senior fellow at the Peterson Institute. He said right now, people only want to buy what they absolutely need. For retailers, that’s a problem.  

“Well, what do you do? Lower the prices very dramatically and basically give people an offer they will find it difficult to refuse,” Kirkegaard said.

Though, is deflation really so bad? It’s hard to argue with gas under $2 a gallon. 

But Karen Petrou, co-founder and managing partner at Federal Financial Analytics, said that’s not a huge help. 

“Gas is cheaper, but people are using whatever dollars they’re able to save to handle their economic shock, to try to pay the rent,” Petrou said.

For consumers who still have jobs and money in the bank, once they start to expect lower prices, they can stop spending too, according to Eric Freedman, chief investment officer at U.S. Bank. 

“It can become more of a self-fulfilling prophecy, if you will,” Freedman said. “People hold off on making purchases because they think that potentially prices will fall in the not-too-distant future.”

Which will make restarting the economy after the pandemic even harder. 

All these worries are for persistent deflation — prices falling month after month after month, said Columbia University economist and former Federal Reserve Gov. Fred Mishkin.

“It’s really not a serious problem as long as it’s only very temporary,” Mishkin said. He added that the Fed stopped a brief bout of deflation during the Great Recession, and its asset purchases, low interest rates and Main Street lending can be effective in reversing deflation again. 

COVID-19 Economy FAQs

What do I need to know about tax season this year?

Glad you asked! We have a whole separate FAQ section on that. Some quick hits: The deadline has been extended from April 15 to May 17 for individuals. Also, millions of people received unemployment benefits in 2020 — up to $10,200 of which will now be tax-free for those with an adjusted gross income of less than $150,000. And, for those who filed before the American Rescue Plan passed, simply put, you do not need to file an amended return at the moment. Find answers to the rest of your questions here.

How long will it be until the economy is back to normal?

It feels like things are getting better, more and more people getting vaccinated, more businesses opening, but we’re not entirely out of the woods. To illustrate: two recent pieces of news from the Centers for Disease Control. Item 1: The CDC is extending its tenant eviction moratorium to June 30. Item 2: The cruise industry didn’t get what it wanted — restrictions on sailing from U.S. ports will stay in place until November. Very different issues with different stakes, but both point to the fact that the CDC thinks we still have a ways to go before the pandemic is over, according to Dr. Philip Landrigan, who used to work at the CDC and now teaches at Boston College.

How are those COVID relief payments affecting consumers?

Payments started going out within days of President Joe Biden signing the American Rescue Plan, and that’s been a big shot in the arm for consumers, said John Leer at Morning Consult, which polls Americans every day. “Consumer confidence is really on a tear. They are growing more confident at a faster rate than they have following the prior two stimulus packages.” Leer said this time around the checks are bigger and they’re getting out faster. Now, rising confidence is likely to spark more consumer spending. But Lisa Rowan at Forbes Advisor said it’s not clear how much or how fast.

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