Note: Economists React: ‘Bursting of Petroleum Bubble’ Takes Inflation Down

Ed: Blind men and the elephant. Like the 1970's, when the price of oil first skyrocketed, pundits forecasted without prior experience. Here we go again. 

Economists React: ‘Bursting of Petroleum Bubble’ Takes Inflation Down

from WSJ.com: Real Time Economics

Economists and others weigh in on the record decline in consumer prices.

The composition of the report supports the interpretation that core inflation is slowing more quickly than we had anticipated. There are no obvious “outliers”, large moves in volatile components that are likely to be reversed next month. The closest to that are the large declines in the lodging away from home category, but those likely reflect real developments in the hotel sector where anecdotal evidence is of a sharp drop in demand. Vehicle price declines also contribute, but again the weakness of demand provides a ready explanation. And the rental components, which are a large share of the CPI, were on the high side (energy prices are a likely culprit as a correction for utilities included in rent tends to move in the opposite direction). Elsewhere, the declines appear fairly widely dispersed, consistent with an overall slowing. –Goldman Sachs

It is too soon to expect the strong dollar or the drop in commodity prices to push core inflation lower; this is all about demand compression squeezing margins. The pressure will likely intensify, and core inflation could now fall quite quickly. Headline now at 1.1% year-to-year; expect dead zero in December. –Ian Shepherdson, High Frequency Economics

The core was restrained by further decreases in new and used cars along with declines in hotel rates and airfares. Also, the personal care category showed some unusual softness due mainly to a bizarre plunge in the financial services subsector. Prices for gasoline and other energy-related items have experienced further declines in recent weeks, so we should see another drop in the headline CPI for December. However, the pace of decrease in coming months is unlikely to be as severe as that seen in November. –David Greenlaw, Morgan Stanley

The 0.2% decline in core goods prices might indicate that the rapid slowing in core inflation is simply pass-through of declining commodity prices. However, core services inflation, which usually runs about 0.2-0.3% higher than core goods inflation, slowed to a modest 0.1% pace, suggesting that the slowing in inflation is becoming more widespread and likely also owes to the declining levels of resource utilization. With the three-month annualized run rate on core CPI inflation now only 0.4%, we would anticipate that the prospect for deflation is being discussed as a very real possibility at today’s FOMC meeting. –Michael Feroli, J.P. Morgan Chase

We do not think that the decline in the CPI should be confused with a monetary deflation. The Fed has eased aggressively and has seen its balance sheet explode since the end of August. In our judgment, the monetary conditions for a sustained deflation are absent. However, Helicopter Ben is likely to be concerned about deflation and the Fed is likely to continue aggressive actions to expand its balance sheet over the coming months (given weakness in housing, we still believe that expansion will be through the purchase of mortgage-related assets rather than Treasuries). –RDQ Economics

The bursting of the petroleum bubble is unwinding the price pressures that had built up during the long run up in costs. That is good news for the consumer who now can pocket the difference. While households may not go out and party with the money, they do seem to be using it to clean up the mess on their balance sheets. When the rebound hits, households should be better prepared to start spending again. We could see a large increase in consumption at that point, especially if, as expected, confidence will surge as well. –Naroff Economic Advisors

Compiled by Phil Izzo