Commentary

Dangerous tide of disinflation on the rise: Economists

NEW YORK • The sinking global economy is suffering a colossal disinflationary shock that could briefly push it into dangerous deflation territory for the first time in decades.

With many national economies all but shutting down in an effort to contain the coronavirus, prices of everything from oil and copper to hotel rooms and restaurant takeouts are tumbling.

"A powerful disinflationary tide is now rising," said JPMorgan Chase's global economist Joseph Lupton.

That's worrying because it could lengthen what may be the deepest recession since the Great Depression. Ebbing pricing power makes it harder for companies that piled on debt in the good times to meet their obligations. This could prompt them to make additional cuts in payrolls and investment or even default on their debts and go bankrupt.

While weak or falling prices may seem like an unalloyed good for consumers, a widespread deflationary price decline can be deleterious for the whole economy. Households hold off buying in anticipation of ever lower prices, and companies postpone investments because they see limited profit opportunities.

Even after the coronavirus crisis eases, the scars from the shutdown - elevated unemployment, shattered consumer and company confidence, and staggered returns to work - may keep price pressures in check, prompting central banks to hold interest rates at record low levels for a protracted period.

"They're at zero for at least the next two years," Mr Ethan Harris, head of global economic research for Bank of America, said of the United States' Federal Reserve.

MONETARY LARGESSE

Further down the road, though, there's a chance that all the monetary largesse - coupled with a massive outpouring of government debt to pay for measures to fight the virus - could spawn a build-up in price pressures.

"It's possible that the response to this over the longer term could have an inflationary consequence," Mr Bill Dudley, former president of the New York Federal Reserve Bank, told a webinar organised by Princeton University last Thursday. "But in the near term, it's very definitely on the disinflationary/deflationary side."

Mr Lupton and his fellow JPMorgan economists forecast that their global consumer price index will temporarily fall below its year-ago level some time in the middle of this year, the first time that's happened in many decades.

Much of that is due to plunging oil prices. Even with their rebound last week on reports of potential production cutbacks, they are still down about 55 per cent since Jan 1.


A sign reading "We Are In This Together" inside the Aloft Hotel, operated by Marriott International, in Chicago. Marriott's CEO Arne Sorenson says: "In terms of our business, Covid-19 is like nothing we've ever seen before." PHOTO: BLOOMBERG

But other prices are also slipping, including for services. They have long been resistant to the downward tug that prices for internationally traded goods have been subject to, but now service-sector businesses are being slammed by the shutdowns. Mr Lupton sees worldwide core inflation - excluding food and energy costs - falling below 1 per cent and says there's a risk it could stay there. "The overwhelming disinflationary force is quite large," Ms Diane Swonk, chief economist at Grant Thornton, told Bloomberg Radio last Friday.

While industrial countries - with the exception of Japan - avoided falling into deflation in the wake of the 2008-2009 financial crisis, they're entering this one with inflation already at depressed levels.

Perhaps the world's biggest source of deflation right now is China, where producer prices registered a 0.4 per cent decline in February compared with a year ago after rising 0.1 per cent in January. That's a drag on the price of goods being shipped overseas from the world's biggest trading nation.

But China isn't the only country in pain. Chain restaurants across Japan have rolled out discount plans for takeout menus, including Yoshinoya, which serves bowls of beef on rice and is running a 15 per cent-off campaign.

The British Retail Consortium reported last Wednesday that shop prices fell 0.8 per cent last month, the biggest decline since May 2018, following a 0.6 per cent drop in February.

And in the US, domestic air fares plunged by an average of 14 per cent between March 4 and March 7, according to booking site Hopper.com. Average revenue per hotel room plummeted 80 per cent during the March 22-28 week from year-ago levels, hospitality-data firm STR reported.

"In terms of our business, Covid-19 is like nothing we've ever seen before," Marriott International chief executive officer Arne Sorenson said in a March 19 video. "For a company that's 92 years old, that's borne witness to the Great Depression, World War II and many other economic and global crises, that's saying something."

Investors seem to be looking for a long period of very low inflation, according to trading in inflation-protected securities, although some analysts caution that the readings may be distorted by a dash for cash. Some economists think it's inflation, not deflation, that's the problem.

"What will then happen as the lockdown gets lifted and recovery ensues, following a period of massive fiscal and monetary expansion?" London School of Economics Emeritus Professor Charles Goodhart and Talking Heads Macroeconomics founder Manoj Pradhan wrote for VOX on March 27. "The answer, as in the aftermath of wars, will be a surge in inflation, quite likely more than 5 per cent and even in the order of 10 per cent in 2021."

Former chief White House economist Jason Furman said faster inflation should be welcomed.

Mr Furman, who is now a Harvard University professor, told Bloomberg Radio last Thursday: "If we get inflation that would be good. That would be a good sign that we have adequate demand."

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on April 07, 2020, with the headline 'Dangerous tide of disinflation on the rise: Economists'. Subscribe