The sinking global economy is suffering through a colossal disinflationary shock that could briefly push it into dangerous deflation territory for the first time in decades.
“A powerful disinflationary tide is now rising,” says Joseph Lupton, global economist at JPMorgan Chase & Co.
Lupton and his fellow JPMorgan economists forecast that their global consumer-price index will temporarily fall below its year-ago level some time around mid-2020, the first time that’s happened in many decades.
Much of that is due to plunging oil prices.
The US crude futures contract hit its lowest level since 1998 on Monday, as concerns that US crude storage will soon be full and bleak economic data hit sentiment.
Oil prices have collapsed by more than 60% since January.
Other prices are also slipping, too.
The world’s biggest source of deflation right now could be China, where producer prices registered a 0.4% decline in February compared with a year ago after rising 0.1% in January.
China isn’t the only country in pain. Chain restaurants across Japan have rolled out discount plans for takeout menus. The British Retail Consortium reported on April 1 that shop prices fell 0.8% in March, the biggest decline since May 2018, following a 0.6% February drop.
In the US, domestic air fares plunged by an average of 14% between March 4 and March 7, according to booking site Hopper.com. Average revenue per hotel room plummeted 80% during the March 22-28 week from year-ago levels, hospitality-data firm STR reported.
What could be bad about falling prices?
When prices drop across a wide range of goods and for a long time, economic activity can grind to a halt.
Delayed purchases squeeze company sales and profits, prompting firms to postpone investment and hiring and to keep a lid on wages. Poorer job prospects and stagnant pay make households stingier, putting more pressure on firms to keep prices down.
Deflation fuelled two of the worst economic disasters in modern times – the Great Depression of the 1930s, and the less catastrophic but more recent experience of Japan’s lost decades with almost no economic growth.
While economists have come up with policy solutions that can tackle inflation, they have had little success devising effective solutions for deflation.
Some argue deflation concerns triggered by the pandemic are overplayed since prices could jump as economic activity resumes and the impact of government and central bank stimulus kicks in, spurring demand.
Yet, even after the pandemic is over, the scars from the shutdown - poor jobs prospects, shattered consumer confidence and patchy recovery in global supply chains - may prevent a quick recovery.
Inflation is typically an easier challenge for central banks in major economies to cope with, because they have plenty of room to raise interest rates from current rock-bottom levels.
“If inflation is the genie,” IMF managing director Christine Lagarde warned in January 2014, “then deflation is the ogre that must be fought decisively.”