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U.S. CPI data expected to remain unchanged

June 10, 2020 By Mircea Vasiu

A few hours before today’s FOMC Statement, the CPI (Consumer Price Index) data is due in the United States. Both the CPI and the Core CPI (excluding energy and food prices) are expected to come out unchanged.  

The inflation data is always on top of the list when it comes to a central bank that has its mandate centered on price stability. The Fed, for instance, guides its monetary policy actions on fulfilling a dual mandate – price stability and maximum employment.

Challenges of Generating Inflation During Recessionary Times

This week we found out that the United States officially entered recessionary territory in March. Ever since, the Fed had a proactive approach and eased the monetary conditions – lowered the rates and delivered an eight-pillar program designed to help all corners of the economy.

With the rates at zero and the quantitative easing program back in full swing, one would expect inflation to get a boost. By increasing the money supply in an economy, the Fed creates the available tools for people and businesses to spend. Inflation should rise to the 2% target, albeit it takes time for the Fed’s decisions to make their way through the economy.

One of the main challenges for the Fed and other central banks during such a recession is the reluctance of businesses and people to spend money.

Faced with uncertainty, investors and households prefer to step back and wait for further clues. Sure, it is tempting to access a loan from the government, with central bank’s guarantees and extremely favorable conditions, to expand your business – but the question is, will there still be a business in the next six months if the consumer is reluctant to spend?

This is the big problem with building inflation expectations and driving current inflation to a place (2%) where it is neither too low to become deflation, or too high to destroy the value of money.

The best way to illustrate the reluctance of households and businesses to put the money in the real economy is the strong appetite from institutional investors for sovereign bonds and fixed-income in general.

Recently, Spain issued €12 billion in a 10-year bond, but it could sell as much as €78 billion, should it choose to do so. The same is valid in other countries and reflects the challenges to kickstart the real economy and why central banks have a hard time pushing inflation to the 2% target.

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