Consumer Prices Plummet as Economy Continues Shrinking

The effects of the COVID-19 economic shutdown continue to be felt, but for consumers, it’s not all bad. Consumer prices fell by the most since 2015, dropping 0.4% in March. [CNBC] Prices had seen a steady uptick since January of 2015, albeit slowly. The core index, however, which excludes food and energy, fell 0.1% in March—the first drop since January 2010. Overall core inflation was up for the year by 2.1%.

Major contributors

The overall price index decreased radically because of declines in a few specific sectors. Airfare, motel, and apparel prices declined 12.6%, 6.8%, and 2%, respectively. These declines were specifically related to COVID-19, as the widespread shelter in place orders have taken their toll. However, real values for the declines remain particularly elusive, given the complexities of travel and purchasing. Per economist Stephen Stanley at Amherst Pierpont:

“You can only buy apparel at places like Wal-Mart, Target, and Costco or online. You can’t buy a sporting event or movie ticket, get your hair cut, or even go to the dentist.”

Inflation or deflation?

The substantial contraction of the economy during this difficult time has left many economists scratching their heads. The impossibility of doing business, along with the record stimulus package, could have long-term inflationary results. As the economy continues to grind to a halt, some prices have already seen inflation. For example, costs for food increased 0.3% in March, on top of an increase of 0.4% in February. This increase was led by costs of dairy, meat, poultry, fish, beef, and eggs, all of which increased over the past year. The conflicting indicators reveal that the market is still staggering to find footing amid the closures. For certain, the very fact that the mandatory shelter orders will end shows deflation will not remain constant (i.e. removing travel bans will bring business back to airlines, etc.).

Print and spend, or halve?

The inflation debates will likely continue, as the market begins to take in the impact of the $2 trillion stimulus payout. As consumers receive payments by mail, overall demand and cost for goods could increase. The future remains somewhat unclear, but the direction of the government is now obvious. The only way through this crisis is apparently large-scale spending. The inflationary concerns come just weeks before Bitcoin’s ‘halving’, when Bitcoin block rewards will reduce by half. Should the demand for Bitcoin remain strong, the eventual deceleration of production could increase demand for the asset in the market.