(The author is editor-at-large for finance and markets at Reuters News. Any views expressed here are his own)

By Mike Dolan

LONDON, June 19 (Reuters) – Like the coronavirus, the big problem with inflation during the pandemic is how little we know about it, an information gap which is forcing central banks to act now and ask questions later.

Economists and investors are split over the implications for long-dormant inflation of the coronavirus crisis.

While few doubt the deflationary impulse of lockdowns and the recessions they have triggered, some fear the massive monetary and fiscal response, together with a rollback of globalisation, may eventually reignite price rises.

Taking a stance now leans more on conviction than evidence.

Although the slide in official headline inflation is not in question, the numbers are messy – with gaps due to ongoing closures of shops, bars, restaurants and cinemas and questions over price baskets that no longer reflect consumer behaviour.

Harvard professor Alberto Cavallo used debit and credit transactions during the lockdowns to develop an “alternative COVID basket” of consumer price weightings.

His paper last month showed consumers spending relatively far more on food and groceries, where prices were rising, and less on transport, hotels and recreation, where prices tanked.

Most official statistics bodies have not updated these since the onset of the coronavirus outbreak.

Cavallo concluded that both headline and core rates of inflation were higher than reported in April in the United States, and in 10 of 16 other countries tested.

The U.S. headline ‘COVID basket’ annual inflation rate for April was 1.06% vs 0.35% reported by the Bureau of Labor Statistics.

“The difference is significant and growing over time,” Cavallo wrote, adding a similar picture emerged when looking at core inflation and shows it’s not just down to just food and energy.

His paper said prices of goods unavailable or ‘not in stock’ – often just excluded from officials measures – clearly rose. And with a heavy reliance on home delivery, goods on many online platforms were priced higher than in shops.

Cavallo says the findings have important implications for policymakers by suggesting the shock to real, or inflation-adjusted, consumption is greater than official data is showing.

The hit to lower income groups would also be larger given they spend a higher proportion of their spare cash on food and essentials rather than leisure.

An obvious caveat is the effect is not universal and can go the other way. Germany, Britain and Italy are among the six countries where ‘COVID basket’ inflation was lower than official data – perhaps partly because earlier lockdowns saw supply bottlenecks ease quicker.

Another is that any pandemic-related distortions are temporary and policymakers should seek to see through them.

U.S. bank State Street said this week that Cavallo’s model suggests the risk of deflation looks “more illusory than real and the ‘true’ rate of inflation is arguably higher than reported.”


So far at least, most monetary policymakers are opting to react to the overwhelming deflation signal – fearing a slump in headline prices today infects expectations over time.

With public and private debt levels mounting ever higher, the prospect of persistent, economy-wide deflation is jarring as it would raise the real cost of paying back that debt over time.

And since Cavallo’s study, headline U.S. and euro zone CPI inflation fell further in May to just 0.1% in both. British inflation fell to a four-year low of just 0.5%.

With monetary easing still in full flow, central bankers are pretty clear where they stand.

U.S. Federal Reserve Vice Chair Richard Clarida said on Tuesday that inflation expectations were in danger of falling below levels the Fed thought consistent with its 2% target. Having collapsed below 1% as the pandemic first unfolded, financial markets’ long-term inflation expectations – captured by 5-year, 5-year forward inflation swaps – are still below 1.6% in the United States and hover just above 1% in the euro zone.

While mindful of the short-term distortions, many central banks feel behavioural changes brought on by lockdowns may simply catalyse puzzling longer-term deflationary trends.

Bank of England policymaker Silvano Tenreyro said last month that lockdown distortions made inflation data “particularly difficult” to interpret but it could be that downward pressures on prices seen beforehand are amplified beyond the lockdowns.

The puzzle, she said, was why strengthening wage growth and unit labour costs had not lifted core inflation in recent years and one possible way to view it was that wage rises were much less in sectors with higher weightings in inflation baskets.

Tenreyro also said falling fixed input costs, such as commercial rents, had helped offset higher labour costs.

“It seems plausible that it may accelerate some of these changes,” she said of the pandemic, citing a faster switch to online retail on wages at bricks-and-mortar shops and the impact of greater home working on commercial rents.

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