Analysts a Wells Fargo do not see a sustain drop in the overall price level, but they explain that a second closing of the economy in coming months could put the US economy on the edge nearer to a deflationary bout. They warn weakness in the labour market could potentially weigh on wage growth.
Key Quotes:
“Some observers worry that the U.S. economy could be on the cusp of deflation, which is defined as a sustained decline in an economy’s overall price level. We look for the overall rate of CPI inflation to dip to 0.2% by year-end, due, at least in part, to the sharp drop in energy prices that has occurred in recent months. We also look for the core rate of CPI inflation to recede to 0.9% due to generalized weakness in pricing power stemming from the sharp downturn in economic activity.”
“Inflation expectations, which have an important bearing on actual rates of inflation, are not at present signaling that deflation is imminent. Survey measures of inflation expectations for the next 5-10 years remain near historic lows, but within the range of the past five years or so.”
“CPI inflation has fallen markedly in recent months. Not only did the collapse in oil prices put downward pressure on the CPI, but the economic standstill caused by COVID-19 has weighed on the core rate of inflation. Although prices of individual goods and services could slide further in coming months, a period of outright deflation, or a sustained drop in the overall price level does not seem likely unless the U.S. economy were to slip into a prolonged slump, which is not our expectation.”
“We acknowledge, however, that a significant acceleration in COVID-1 cases could lead to a second closing of the economy in coming months. In that event, the U.S. economy could edge nearer to a deflationary bout.”
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