The core consumer price index, which excludes volatile food and energy costs, fell 0.4% in April, the biggest drop in the index on record, dating back to 1957. Compared with April of last year, the core CPI rose 1.4%, the smallest annual gain since 2011.
The state of play: March's core CPI reading was also negative, marking the first back-to-back negative prints since 1982.
What it means: "Economic models, as well as lived experience, tell us that prices should be falling with demand in free-fall, and in today’s release it is clear that they are," AllianceBernstein senior economist Eric Winograd says in an email.
- "Inflation is not the focus of the market, nor of policy-makers, for now or for the foreseeable future."
Yes, but: That may be a mistake, says BlackRock’s CIO of global fixed income Rick Rieder.
- "There’s a danger in merely extrapolating recent trends, and we think 2020’s broad deflationary influences may well lead to higher rates of inflation next year," he says in a note to clients.
- "We think that even a modest re-setting of oil prices over the next 18 months could drive 2021 inflation in a manner that offsets some of the declines occurring now."
Between the lines: Both Rieder and Winograd see the "monumental" policy response from the Fed and the government as likely to drive inflation well above levels currently priced in by the market, which Rieder calls "unrealistic and excessively pessimistic."
- David Zervos, chief market strategist at Jefferies, goes further, asserting that "the extraordinary policy response to COVID-19 marks the beginning of the end of the disinflationary era in existence since the early 1980s."