June 26,, 2020
There are many different measures of inflation, but the one that the Federal Reserve considers to be most important is the personal consumption expenditures deflator, in particular the PCE deflator excluding the volatile food and energy components.
The PCE deflator rose 0.1% in May after having fallen 0.5% in April and 0.2% in March. The year-over-year increase now stands at 0.5%.
Excluding the volatile food and energy components the PCE deflator rose 0.1% in May after having declined 0.4% in April and 0.1% in March. The year-over-year increase is now 1.0%. This is the inflation measure that the Fed would like to see rise by 2.0%.
The world has changed in the past three months as a result of the corona virus. The global economy basically shut down in March and April and, as a result, we now expect second quarter GDP to decline by a record-shattering 50%. In the process of a global economic recession, commodity prices have fallen sharply.
But help is on the way. The government has adopted $2.5 trillion of fiscal stimulus which result in $1,200 checks being sent to virtually every taxpayer. Payroll employment, retail sales, and durable goods orders have rebounded sharply in May. The stock market has already recovered two-thirds of its earlier decline. As a result, third quarter GDP growth could rebound by 51.0% with an additional 7.0% gain in Q4.