Fed Study Says Pandemic Likely to Have Muted Impact on Deflation
Pedestrians wearing protective masks walk past signs advertising retail space for lease in San Francisco, California, U.S. (Photographer: David Paul Morris/Bloomberg)

Fed Study Says Pandemic Likely to Have Muted Impact on Deflation

(Bloomberg) -- The global pandemic will likely only suppress prices mildly, even as businesses shut down and consumers halt spending, according to research from three economists at the Federal Reserve Bank of San Francisco.

The economists, Jens Christensen, James Gamble and Simon Zhu, created a model based on the prices of standard and inflation-indexed government bonds in the U.S., Canada, France and Japan, analyzing the one-year probability of deflation in each of the four countries.

The model shows that the chance of net price decreases remains near zero for all but Japan, “which has only a modest risk of 11%.” Inflation in Japan has been near zero for much of the past 20 years.

“Overall, these results suggest that the perceived odds of deflation occurring in leading economies as a result of the coronavirus crisis are currently low,” the economists wrote in an Economic Letter posted Monday on the San Francisco Fed’s website.

Stay-at-home policies around the world, put in place to try and curtail the spread of coronavirus, have spurred concern that some countries may see deflation, or an outright decline in general price levels, as consumers stop shopping and demand falls.

In the U.S., where the consumer spending accounts for 70% of the economy, personal consumption dropped 7.5% in March from the prior month, the most on record. The U.S. government is scheduled to release April’s consumer price index data Tuesday at 8:30 a.m. in Washington. Economists surveyed by Bloomberg expect inflation to soften sharply to 0.4% year-over-year last month compared with 1.5% in March.

Government bonds are a way to gage investors’ future expectations, the San Francisco Fed economists said.

The economists also compared bonds that don’t offer inflation protection to those that do, finding that the difference, or spread, between these was close to zero in Canada and the U.S., and had a mild upswing in France that started before the pandemic. Japan had a spike in the spread, which was already elevated due to its low inflation.

©2020 Bloomberg L.P.

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