Virus disinflation?

Posted by: Paul Donovan

28 Feb 2020
  • There has been a rise in web searches for "coronavirus" as markets have fallen. The risk is that markets weaken on fear of consumer fear, so people search more, so markets fear that there is more consumer fear. Consumer behavior is critical for the global economy as growth has become dependent on consumer (and government) support. 
  • It is worth remembering that forecasters nearly always underestimate human resilience, and thus economic recovery from big shocks. The initial damage is correctly assessed, but the bounce back tends to come earlier and stronger than consensus expects.
  • Several Eurozone economies produce CPI data today. The effect of the virus is likely to be mildly disinflationary over time. Weaker demand for commodities and travel will lower prices. Supply chain disruption is unlikely to raise prices as it is seen as temporary (the US trade taxes had a similar effect).
  • US personal income and consumption numbers are due. Structural labor market changes mean that household income is a better guide to what is happening than average hourly earnings. Income and consumption are expected to remain firm. There is a consumer sentiment opinion poll due, and Bullard of the Fed is speaking.

Explore more CIO Daily Updates