The Bureau of Labor Statistics will release its measure of the March average of prices of a basket of consumer goods, such as food, housing, and medical care on Friday. Economists predict that the consumer price will drop 0.3%, the first decline since -0.1% in March 2018. The core prices which exclude energy and food are expected to go down to 0.1% in March from 0.2% in February.
1. A sharp decline in consumer prices
The Federal Reserve cut interest rates to neat zero on March 15 to cushion the coronavirus impact because the business shutdowns for defeating the pandemic led to massive layoffs and demand destruction.
Before the pandemic wreck havoc the businesses, inflation has steadily run below the Fed’s 2% target despite the economic growth and a strong job market. Considering the factors causing disinflation like skyrocketing unemployment rate in March (4.4%), the closing of many service sectors and low oil prices, it is reasonable to expect weakened consumption and dropped consumer prices.
2. Plunging consumption amid layoffs and economic uncertainties
The number of jobs lost in March was 701,000, and the unemployment rate recorded a sudden jump (4.4%). Martha Gimbel, a Manager of Economic Research at Schmidt Futures, said that layoffs would lead to sharp reductions in consumption. People will fear to spend their money because of the decrease in income. It is difficult to anticipate when the pandemic ends or the halted business will be recovered to pre-pandemic status. Comprehensively, consumer confidence has drastically shrunk after the coronavirus hit the nation.
“People need to keep in mind that, no matter what, consumer spending is going to pull back,” said Gimbel.
3. The unusual consuming patterns
The coronavirus also changed Americans’ consuming patterns dramatically. People do not go out for dinner or shopping, and stores are shut down for keeping social distance since the states’ announcing unessential business shutdowns after the week of March 8, like California closed bars, nightclubs, and wineries on March 16, 2020. In the era of the coronavirus, there are no spring sales, spring break travels, and hustling brunch restaurants.
“In March is where usually retail sales are ramping up. You are normally looking at spring sales this season. People are buying new clothes and things,” said Scott J. Brown, Chief Economist at Raymond James. “But now the coronavirus is happening, you’re not going to see much discounting, and people don’t go out shopping.”
4. Cheap oil prices
Oil prices have hit a new low since January when the coronavirus slowed down the Chinese economy and reduced the global demand for oil. In addition to the cessation of Chinese factories, since the last week of February, the oil price war between Saudi Arabia and Russia sparked, and it accelerated the price drop. Russia and OPEC reach a deal to trim oil production today, but the weak oil price has been being maintained because of the ongoing influence of the pandemic and poor economic growth.
“It may boost the oil price a bit depending on what happens [at today’s meeting of Russia and OPEC,” said Stephen Gallagher, a chief economist of Societe Generale. “But there’s an agreement that the trend will continue.”
- Data collection problem
The March CPI report is likely not to reflect the exact prices consumers see in the stores under the circumstance that the coronavirus hit businesses around the nation since the second week of March. Economists believe that there is a collection problem this month. Because many stores shut down, and people’s demand and products’ supply fluctuate depending on the situation, it would be tricky to measure how consumers need to pay for goods and services like hand sanitizers, toilet papers, and medical care.
Brown said, “We don’t really know how the collection issue is going to affect the numbers. Whatever we get, people will just put it aside.”