In 1995, a little-followed (at the time) indicator provided a warning that the inflation landscape was changing. The durables component of the consumption deflator was not on the radar screen for many analysts, but it proved prescient. It slipped into deflation territory (in September 1995), ahead of the equivalent index within the CPI.
This was a clear signal, that China’s emergence as a core manufacturing base, coupled with rapid productivity gains, would lead to an era of lower prices. The IT boom was in its infancy too.
The CPI for durables eventually turned negative (y/y) in June 1997, but it has not always been falling. The consumption deflator has been better at picking up the switching and substitution effects, that have tended to reflect the downward pressure on prices. It has been in negative territory, almost without interruption, for over 25 years.
But the gap between these two indicators has narrowed: And for the first time, since the onset of durables deflation a quarter of a century ago, the consumption deflator now mirrors the CPI. Prices are rising.
The collapse in energy prices could, of course, provide a very useful antidote to upward pressure on prices in other areas of the economy, as it adjusts to a semi-permanent battle with Covid-19, which will inevitably disrupt supply chains, and fuel hysteresis.
Summary
• Hysteresis back?
• Structural job losses
• But energy collapse intensifies
