INDICATOR: March Consumer Prices and Real Earnings

KEY DATA: CPI: -0.4%; Over-Year: 1.5%; Ex-Energy: 0.0%; Over-Year: 2.1%/ Real Earnings: +0.8%; Over-Year: +1.6%

IN A NUTSHELL: “Inflation is really not doing much, which is a surprise given the craziness in the economy.”

WHAT IT MEANS: Consumer prices fell in March, which surprised no one. Given the collapse in the economy, that was expected. But much of that decline was due to a double digit declines in gasoline and fuel oil. The price war between Russia and Saudi Arabia made that happen and was expected. Excluding energy, costs were flat, which was a surprise. Food prices, both at home and away, were up solidly, while services prices were flat. In the services component, shelter expenses, which had been surging, flattened out. But medical costs, which also had been rising sharply, increased even more. Transportation was down sharply.

The earnings numbers in March implied that workers did really well, as wages rose sharply. Adjusted for the decline in prices, that meant real earnings soared. But these data are misleading. The large rise in average hourly wages was due to the way the number is calculated.

It is a weighted average. In March, the huge drop in employment came from major layoffs in lower paying industries. Higher paying sectors lost relatively less. So, when you do a weighted average and you take out more from the bottom than the top, the average rises. I don’t think workers did particularly well in March.

MARKETS AND FED POLICY IMPLICATIONS: In some respects the relatively mild decline in consumer prices and the flat change excluding energy is good news. Core inflation, which excludes volatile food and energy, had been slowly climbing back to target levels. A massive collapse in the economy was expected to lead to a major deceleration in inflation, which could be worrisome. That did not happen.

With energy prices bouncing off the bottom, we could see the headline number up in April. Thus, the shut down of the economy has not yet lead to a deflationary environment. It is hard enough to fight a virus-induced decline in economic activity, having to deal with falling prices as well is not something the Fed wants to face. Of course, getting the economy going again will be the best way to fight any decline in inflation.

I think the economy will have a ‘Vu’ recovery. We may get a major rebound, if only because opening closed sectors means that activity will surge. But it is the following few quarters that really matter and it will be hard to sustain demand when we start with and unemployment rate that could hit 20%.

The unemployment rate in February was 3.5%. Getting back to an unemployment rate close to that level, and I define close as one percentage point above the bottom, could take five years. That was the pattern in the past and it could easily take that long after this crisis. That means after the rebound, there could be a slowdown as the government’s welfare program fades and businesses have to actually earn money to pay for their workers. That would then lead to a slow recovery, similar to what we saw after the Great Recession. Investors may think that the problems are behind us, but reopening and repairing the economy is not going to be easy and it will take a long time.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.