Explain why inflation has dipped so low during covid 19?
Answers
Explanation:
Inflation Trends across PCE Components
Inflation Trends across PCE ComponentsDurable Goods
Inflation Trends across PCE ComponentsDurable GoodsThe figure below shows the durable goods inflation rate and the overall PCE inflation rate. For most of the sample period, durable goods inflation was negative (deflation), and the average inflation rate held fairly steady across the previous two expansions. These negative inflation rates indicate that prices for durable goods have generally been falling over the previous two decades.
PCE and Durable Goods Inflation
Since April 2020, however, there has been a sharp uptick in the durable goods inflation rate, which has contributed to the recent increase in the overall PCE inflation rate. Pandemic-related supply chain disruptions for inputs such as automobile parts and computer chips drove up the prices for many durable goods in recent months. These price increases are likely to be transitory, though, and durable goods inflation rates are expected to fall as supply chains resume their normal flow.
Nondurable Goods
The next figure displays the nondurable goods inflation rate and the overall PCE inflation rate. The average nondurable goods inflation rate dropped substantially from the 2001-07 expansion (3.1%) to the 2009-20 expansion (0.9%). This decline contributed to overall lower inflation during that most recent expansion.
PCE and Nondurable Goods Inflation
As evidenced by the figure, nondurable goods inflation is quite volatile, driven largely by fluctuations in gasoline and energy prices. At the beginning of the pandemic, the nondurable goods inflation rate dipped with the decline in gasoline and energy prices, but the rate has since increased as those prices have rebounded.
Services
The figure below displays the services inflation rate and the overall PCE inflation rate. Over the last two decades, prices for services have generally increased at a higher rate than the other PCE components. That rate, however, dropped considerably following the Great Recession (2007-09), and the average services inflation rate in the second expansion was about one percentage point lower than in the first. As the pandemic commenced, the services inflation rate dipped a bit, but since that initial dip the rate has generally trended upward.
PCE and Services Inflation
The PCE services component comprises subcomponents such as housing, health care, transportation, recreation, financial services, as well as food and accommodation. The figure below shows the inflation trends for the two subcomponents with the largest expenditure shares: health care and housing.
Services, Health Care and Housing Inflation
Since 2016, the health care inflation rate has mostly risen. Meanwhile, the housing inflation rate (which is calculated using rent prices) has declined. However, home prices have surged in recent months with a hot housing market, and rent prices might follow suit; this means that the housing inflation rate could start to rise in coming months, thus increasing the services and the overall PCE inflation rates.
The importance of these two subcomponents cannot be understated. Housing and health care constitute services for basic necessities; if inflation rates for these categories rise substantially in the coming months, concerns may surface regarding the affordability of these services for low-income households, particularly if wages do not rise at the same rate.
As we track how the overall inflation rate changes in the coming months, it will also be important to identify what components of the PCEPI are driving those changes, why we observe those inflation dynamics, and how price patterns may impact various demographics of the population.