Wednesday, August 26, 2020

San Francisco Fed: Covid-19 Demand Shock Currently Has The Upper Hand In The Inflation Puzzle

So there I was, idly scrolling through Central Banking, ah the head of the Zambian Central Bank was sacked.
The Eurozone's Eastern Conundrum.
Demand Driving Fall in U.S. Inflation, ...
Wait what?

From the Federal Reserve Bank of San Francisco:
2020-24 | August 24, 2020
Monitoring the Inflationary Effects of COVID-19
....The results show that demand-sensitive inflation began declining as early as March, subtracting 0.3 percentage point from year-over-year core PCE inflation that month. By April, it subtracted 0.7 percentage point from year-over-year core PCE inflation. The effect from demand-sensitive factors appears to be slowly eroding, as it subtracted 0.5 percentage point in June. Supply-sensitive and ambiguous categories are contributing approximately the same as they were before the COVID-19 pandemic. Thus, as of yet, the majority of the decline in COVID-sensitive inflation, and therefore core PCE inflation, can be explained by a strong decline in demand.

Months after the onset of COVID-19 in the United States, core PCE inflation remains at particularly low levels—approximately a full percentage point below the Federal Reserve’s 2% target. Breaking down the components of inflation as proposed in this Economic Letter, and discussed in more detail in Shapiro (2020), can help monitor the impact of the pandemic on inflation. Consistent with the findings of Leduc and Liu (2020), current data show that the recent drop in core PCE inflation is mainly attributable to large declines in consumer demand for goods and services stemming from COVID-19, which have more than offset any upward inflation pressures due to supply constraints in some sectors.....

If interested see also via the San Francisco Federal Reserve Bank by the same author:
A Simple Framework to Monitor Inflation
Adam Hale Shapiro∗August 19, 2020
34 page PDF