Broad and core US inflation printed lower than expected in March reflecting downward pressure from fuel prices, narrowing demand for apparel, transportation costs but only moderate upside pressure in other components. On the side of negative risks for CPI we can note explosive growth in unemployment and deepening fuel price deflation because of the oil price shock. The massive anticipated increase in government spending including tax reliefs and transfers to impacted households is likely to create inflationary pressures on certain goods including food while easing monetary policy is expected to have minor impact on prices due to decreasing supply and demand for loans.
The broad CPI declined 0.4% compared to February, holding back annual inflation which amounted to 1.5%. The fall was stronger than expected (-0.3%), price declines were led by fuel prices (-5.8%), transportation costs (-2.9%) and price for apparel (-2%).
The rest of consumer categories showed muted inflation pressure. The price for tobacco products gained 1%, prices for medical services increased by 0.4%, food inflation amounted to 0.3%. Rental prices rose 0.3%. Inflation in services sector decreased by 0.1% in monthly terms and amounted to 2.1% in annual terms against 2.4% in February.
Considering the negative risks for inflation, the biggest of them is collapse in oil prices, which feeds into retail prices for gasoline, utilities, producer costs what in turn limits inflation on final goods.
Travel and transportation curbs will adversely affect housing prices, hotel accommodation prices, and rental rates. The weight of this component in the CPI is 33%.
Demand for services usually depends on the dynamics of the wages of the population. The explosive rise in US unemployment (+17 million over the past three weeks) is likely to translate into price deflation in this sector. The weight of this component in the CPI is 26%.
The minutes of the March Fed meeting revealed that officials do not expect inflation to accelerate in the near future even after a possible restart of the economy in the summer or even if lockdowns continue until the beginning of next year. According to the report, in all scenarios, inflation is expected to weaken, reflecting underutilization of resources and the drop in oil prices.
Loosening access to credit won’t lead to perceptible increase in consumer inflation unless, in fact, credit expansion takes place, which depends on the desire of banks to issue loans and on the demand of households for them. The main effect that we can expect is asset price inflation with first signs of it expressing in the latest stock market rebound in response to Fed actions.
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