Every month, the Bureau of Labor Statistics releases a consumer price index report detailing the monthly rise and fall in prices across the United States. Tomorrow’s inflation numbers are set to show headline CPI down and core CPI, or price indexes excluding food and oil, flatlining or slightly falling in March. However, economists say that these numbers need to be looked at carefully.
Problems with data collection
Monthly CPI is determined by two surveys conducted by the BLS; the commodities and services pricing survey, and the housing survey, a survey of landlords and tenants used to provide rent data.
The data is collected throughout the month and while some surveys are collected through telephone and websites, in-person surveys account for 65% of CPI price data and 50% of CPI rent data according to the BLS.
Responding to the urgent public health need to stay home, the BLS suspended in-person data collection in the Seattle, Washington area on March 5 and all in-person data collection nationally on March 16.
In a written statement released by the BLS, the department stated that they only publish data that passes a data-quality standard known as an adequacy ratio.
“We’re in uncharted territory and they do work to get data out there, you’re just gonna be a little bit careful interpreting it in. Double-check the response rates,” said Ryan Sweet, head of monetary policy research at Moody Analytics.
Energy prices expected to drag headline CPI to deflationary levels
Headline CPI is expected to dip to its lowest point in years due to the heavy drag of falling energy prices.
The drop in energy prices in March was due mostly to falling demand from China according to Christopher Low, chief economist at FHN Financial. As businesses and economies shut down across the globe, the U.S. will continue to see it’s future CPI numbers depressed.
The ongoing price war between Russia and Saudi Arabia will continue to pull energy prices down and show up predominantly in April’s numbers.
“There’s an enormous glut of supply of oil, and that’s putting a lot of pressure on oil prices,” said Sweet. “There’s just more supply than there is demand.”
The food and shelter price indexes are expected to increase
Prices at the grocery store are expected to increase. As restaurants closed and people were forced to shelter in place, grocery stores became the only viable option and demand for food at home surged.
Some foods have faced supply problems which drove up prices.
“Eggs are in short supply and meat prices haven’t yet increased but might in the coming months because there are some supply problems there too,” said Low.
Shelter prices are also expected to increase slightly in the short-term. According to economists, housing prices are considered sticky and somewhat unresponsive to supply and demand shocks in the short-term.
“Housing prices eventually are going to fall but they tend to be slower moving than other prices,” said Low. “In the early months of recessions, house prices tend to rise, and that’s because they’re still reflecting the strength of the economy before the recession began.”
Not all price indexes are created equal
The consumer price index works off of a weighted system.
“CPI is roughly based on how much consumers spend on different items, the weights are only adjusted annually. They’re not adjusted every month,” said Low.
So some indexes will have a stronger visible effect on the headline and core CPI numbers. Housing has one of the biggest effects on CPI but food and energy are also heavily weighted. If food and housing go up, it will pull the overall number higher.
“I think what is maybe more interesting is what we don’t know, but might see in the report. Is there any discounting going on in other areas? In particular, I’m going to take a good look at cars. Car sales were quite weak in March,” said Low.
Deflation is a serious concern
Deflation is seen as a big concern for the economy and the Federal Reserve.
“The reason deflation is economically debilitating is that it feeds on itself. So people don’t go out and purchase goods and services because they expect those prices to be cheaper next month or next year. And that just continues to feed on itself and it alters people’s behavior,” said Sweet.
Consumer spending accounts for two-thirds of the U.S. GDP, so if people aren’t spending after the shelter in place is lifted, deflation could spiral.
But deflation is defined as persistent decline in core prices month over month for 12 months, according to Sweet.
The U.S. isn’t there just yet but the Fed is still worried.
“The Fed’s economic staff in the minutes warned that extended low inflation or even deflation is a bigger risk in the economy now than rising inflation.”
Unfortunately, should deflation become an issue, there is not much the Fed can do.
“When the economy is stronger again, they can keep rates low for a while and hopefully boost inflation. But I think it’ll be at least a decade before we see 2% inflation again,” said Low.
While specific CPI numbers may not mean much when the report comes out tomorrow, overall trends in prices for march indicate an already struggling economy that is sure to continue in the future. Even with the small business loans currently available and potentially additional economic support, many small businesses that the U.S. economy depends on will not survive the shutdown.