Why inflation has dipped so low during the covid19 period
Answers
Explanation:
The COVID-19 pandemic has led many countries to implement social distancing, lockdowns and travel restrictions, which have resulted in a collapse in the world economy unprecedented in peacetime. The real-time effects of the ‘Great Lockdown’ on employment and consumer expenditure have been widely documented (e.g. Bartik et al. 2020, Chetty et al. 2020, Villas-Boas et al. 2020). However, much less is known about how the crisis is impacting inflation.
In a new paper (Jaravel and O’Connell (2020), we use live scanner data to document patterns of inflation. We hope our approach can serve as a template to facilitate rapid diagnosis of inflation risks during economic crises, leveraging scanner data and appropriate price indices in real time.
The Great Lockdown entails a combination of substantial shocks to both demand and supply (e.g. Brinca et al. 2020, Guerrieri et al. 2020). It is therefore plausible that the crisis may lead to deflation, disinflation, or higher inflation. Falling aggregate demand, due to heightened uncertainty and reductions in incomes and liquid wealth, may lead to deflationary pressures. Conversely, inflationary pressures may arise from increases in production costs, due to interrupted supply chains and to the impact of social distancing restrictions on labour supply. By shutting down some sectors of the economy, the Great Lockdown may lead to changing patterns of demand that translate into shifts in the degree of market power firms exercise, which will affect equilibrium inflation. These pressures will differ across sectors, and therefore it is likely inflation also will. Sectoral inflation heterogeneity in turn is likely to feed through to heterogeneous inflation experiences across households.
Accurate and timely measurement of inflation is key for the design of policies aimed at paving the way for the recovery – both for central bankers in charge of maintaining price stability and for policymakers in charge of the design of transfer programmes aimed at mitigating the effects of the economic shock on vulnerable groups.
Scanner data, in which a large sample of households record purchases of fast-moving consumer goods, provide a way of tracking what is happening to prices in an important sector of the economy. Such data have a number of key advantages for tracking inflation over the crisis, including that they contain millions of transaction prices, up to date expenditures weight, and information on households’ socio-demographic characteristics.
In Jaravel and O’Connell (2020), we leverage real-time scanner data for the UK from Kantar FMCG Purchase Panel to track how prices have changed during the Great Lockdown among fast-moving consumer goods (i.e. grocery products, including food, alcohol and non-foods). We use information on over 30,000 households and 13 million transaction in 2020 up until mid-May, as well as data over the same period in the years 2013 to 2019. We compute price indices which are grounded in economic theory and allow us to measure inflation across product categories and households. We establish four findings.
First, we document a large spike in inflation. In Figure 1 we show cumulative monthly inflation over the five months running to 17 May for all years from 2013 to 2020. In the first three months of 2020, month-to-month inflation is close to zero and similar to previous years. However, in the month 18 March to 17 April, there is a large increase in inflation of 2.4 percentage points. In the month 18 April to 17 May, there is modest deflation, though prices remain well above their pre-lockdown level.