The May Consumer Price Index (CPI) reported a headline number of -0.1%, down slightly from unched expected; April’s -0.8% — the worst read on headline inflation since 1947 — went unrevised. On the “core” level — ex-food & gas (to eliminate month-to-month volatility in such commodities) — we also see -0.1%, down again from unched expected. The core read for April went unrevised at -0.4%, which was the worst level in recorded U.S. history (1957).
The drag on consumer prices came from not-unexpected places: Transportation -3.6%, Gasoline -3.5% and Apparel -2.3%. When we look at another down month from historic lows the previous month on core, that is a clear indication that disinflationary impulses are affecting the market. Year over year, headline CPI is +0.1% (very weak, but at least still positive), while core is +1.2%.
This comment on disinflation — not to be confused with deflation, which is the economic nightmare that watches economic value evaporate — brings to mind Fed Chair Jay Powell, who issues comments at 2pm today following the second day of talks with the Federal Open Market Committee (FOMC). Discussions among the members must include the effectiveness of massive capital liquidation in addition to slashing interest rates to zero ahead of the “shelter in place” initiatives that closed down the U.S. economy in March.
We also may expect some discussion from Powell on the issue of bringing about negative interest rates, which would be sort of an uber-liquidation of capital in order to defend against deflation in the economy. While it’s probably an easy bet Powell will adhere to comments reflecting a continued easy monetary policy, going negative on interest rates — where banks would pay you for parking their money — may be a bridge too far. We’ll certainly listen to what the Fed Chair has to say about it.
For one thing, banks paying interest to investors — basically, to keep people from stuffing cash under their mattress, which runs counter to what a healthy economy would look like — likely would rapidly reduce banks’ collective appetite for making loans at all. This would lead to the very deflationary conditions negative interest rates would be designed to protect us from. More simply put, Powell — despite President Trump’s eagerness to see negative interest rates utilized for their “Big Numbers!” — is likely to pull up short of such an initiative.
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