Inflation: Slouching towards zero
[Greg Ip] THE deflation meme is back. Today the Bureau of Labour Statistics reported that headline consumer prices fell in April, though they’re up 2.2% from a year ago. Excluding food and energy, core prices were flat and up just 0.9% from a year earlier, the lowest rate of annual core inflation in either 44 or 49 years, depending on who’s counting.
Some folks argue the drop in inflation is exaggerated by the large weight given to owners’ equivalent rent. (This component uses tenant rent to calculate the cost of owning a home.) Rents have been depressed by the large stock of vacant units. Morgan Stanley notes that excluding shelter, core inflation is still 2.2%, and it predicts shelter costs will start to rise given recent firming in industry surveys of apartment rents.
But J.P. Morgan retorts that industry surveys are biased to large, multi-unit apartment buildings whereas single houses are more important to OER and their rents are rising more slowly. Goods prices, unusually firm until now, are starting to soften. Other disinflationary factors include the recent rebound in the dollar and the drop in the price of oil. Most important, wage inflation remains quite soft, although it showed some signs of firming in April.
Even if the disinflation trend is overstated a bit, I don’t see how the risks can be weighted in any direction but down. That some economists characterise this report as “benign” is understandable but wrong-headed. Inflation headed towards zero is not benign. It is especially not benign when the financial system is deleveraging, when rule makers in the Senate and in Basel, Switzerland are reinforcing that process, and when the Fed has no room to cut short term rates and is debating when to exit quantitative easing.