Inflation figures are about to get fuzzier
In the wake of the most serious pandemic for a century, growth will plunge and unemployment will rise. But what will happen to inflation?....MUCH MORE
Economists are split. Some, such as Charles Goodhart, believe supply constraints and rampant government spending will push up prices. Others — such as Gavyn Davies — think otherwise, arguing that demand will be so weak that inflation will remain subdued.
We’re not going to make a judgment on what’s going to happen longer term. What we want to spell out here is two things about the readings over the next few months. The first is inflation will drop dramatically. The second is the official readings will be misleadingly low. Here’s why.
Oil alone is enough to drive inflation downStatisticians calculate inflation using a “basket” of goods and services that represents the nation’s spending habits. Prices for energy and other goods affected by the oil price take up a big proportion of people’s spending wherever you look — they account for more than 10 per cent of the inflation basket in the eurozone, for instance.
Sub-zero crude will, in Davies’ view, help push inflation in the eurozone into negative territory almost immediately.
But people may not feel any wealthier.
Take the impact of the oil price shock on one of the most important crude-related goods: diesel. It’s already been profoundly hit. According to German website clever-tanken.de, the price of diesel at the pump has plunged from around €1.30 per litre in late January to €1.04. Few of us are driving much at the moment, though.
Which brings us to our second point.
The basket case
The pandemic has had a drastic impact on consumption patterns....
