Fed study says pandemic should have limited impact on deflation By Bloomberg

(Bloomberg) – The global pandemic will likely only lower prices slightly, even when businesses close and consumers stop spending, according to research by three economists from the San Francisco Federal Reserve Bank.

Economists Jens Christensen, James Gamble and Simon Zhu have created a model based on the prices of standard government bonds and indexed to inflation in the United States. USA, Canada, France and Japan, analyzing the probability of one-year deflation in each of the four countries.

The model shows that the probability of falling net prices remains close to zero for all except Japan, "which presents a modest risk of 11%". Inflation in Japan has been close to zero for much of the past 20 years.

"Overall, these results suggest that the perceived chances of deflation in major economies as a result of the coronavirus crisis are currently low," the economists wrote in an economic letter published Monday on the website of the San Francisco Federal Reserve.

Housing policies around the world, implemented to try to reduce the spread of the coronavirus, have raised fears that some countries as consumers will experience deflation or an absolute decline in overall price levels. they stop buying and demand drops.

In the United States, where consumer spending accounts for 70% of the economy, personal consumption fell 7.5% in March from the previous month, the highest amount ever recorded. The U.S. government plans to release data for the April Consumer Price Index on Tuesday at 8:30 a.m. in Washington. Economists polled by Bloomberg expect inflation to fall sharply to 0.4% year-on-year last month from 1.5% in March.

Government bonds are a way of measuring future investor expectations, said economists at the San Francisco Fed.

Economists also compared bonds that do not offer inflation protection to those that do, finding that the difference, or spread, between them was close to zero in Canada and United States, and they experienced a slight rebound in France that started earlier. of the pandemic. Japan has seen an increase in the spread, which was already high due to its low inflation.

© 2020 Bloomberg L.P.