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November 12, 2020 Blog 2 min read
Even coming off the strongest quarter for growth in history, inflation was flat in October. That speaks directly to the ongoing slack in the economy and the substantial remaining runway for the economy to recover before the Fed is going to need to move away from accommodation toward tightening.

 October 2020 CPI

The consumer price index (CPI) remained unchanged in October, against expectations for a modest increase of 0.1%. Food prices were up slightly, while energy costs declined, leaving core inflation also flat for the month. The 12-month change for both the headline (1.2%) and core (1.6%) measures also declined modestly last month, which broke a string of four consecutive monthly increases for the headline index.

Prices declined sharply earlier this year as demand collapsed for many services, discretionary goods, and gasoline and other fuels. When the economy began to reopen and spending surged, gauges of inflation also began to recover. Even so, demand has still not fully returned to pre-recessionary levels in some sectors of the economy, leaving enough slack for broad price measures to edge gradually higher from here.  

Arguably the greatest threat to the near-term economic outlook is the resurgence of COVID-19 across much of the country. The recovery appears well positioned to continue, but the potential for more stringent policies being reintroduced to reduce the pace of spread could present a headwind to activity, particularly for those areas of the service economy that are dependent on face-to-face contact. While demand for goods should hold up better, consumers are likely to continue to gravitate toward online commerce and away from brick-and-mortar retailers to reduce their potential exposure risk.

Recent promising news related to the development of a vaccine may provide a very significant light at the end of a very dark tunnel, but the timing of mass availability for any vaccine remains an unanswered question. Such a breakthrough provides greater confidence in the intermediate-term outlook for a return to a more normal environment but doesn’t change the near-term outlook for the spread of the disease.

Although recent attention has been firmly focused on last week’s elections, COVID-19 remains the greater source of economic uncertainty at this juncture. The near-term path forward will likely be determined by the ability of the economy to sustain its considerable, albeit slowing, momentum in the face of potential restrictions on travel, public gatherings, and various activities that create exposure risk. 

Against that backdrop, a meaningful pickup in inflation pressures over the near-term appears unlikely, although there could be pockets of higher prices for goods and services that remain in demand, particularly if their availability is curtailed. The potential for another wave of household stockpiling could also result in surging prices for impacted goods.

Even so, broad inflation measures are unlikely to experience significant upward pressure anytime soon.  That bodes well for the recovery and should allow the Fed to remain on the sidelines and hold short-term interest rates low for some time to come.

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