Coronavirus-driven store closures and the enforced freeze in large areas of consumer spending have made it impossible to produce accurate data on inflation, leaving a big gap in policymakers’ ability to track how lockdowns and stimulus measures are affecting the economy.
Statistical authorities in the US, UK, France and Italy have all warned in recent weeks that they are no longer able to conduct face-to-face visits to collect prices, while big shifts in consumer behaviour mean that the weighted baskets of goods and services they track are no longer representative of household spending.
Statisticians measure the overall level of inflation in an economy by tracking price changes for a basket of representative goods and services — ranging from essentials such as food, energy and transport to consumer services such as hairdressing, funerals and dating agency fees — with each item weighted to reflect its importance in a typical household’s budget.
The latest data, for March, is only modestly affected by the shutdowns to deal with the spread of the pandemic, but statistical agencies have said that the longer lockdowns are in place, the harder it will become to produce reliable data — especially if coronavirus leads to lasting changes in the pattern of consumer spending.
“The health crisis we are going through is profoundly and suddenly disrupting the structure of household consumption,” France’s national statistics agency Insee said in a note published alongside figures for March — adding that these largely reflected conditions at the start of the month, before the country went into lockdown, and that the gaps in the data for April, due next month, would be bigger.
This presents a big problem for central banks — which already face charges from some critics that their stimulus policies will lead to hyperinflation, while others warn that the world is falling into a deflationary trap that will leave indebted governments in deep financial difficulty. It also means that governments risk underestimating the extent of financial hardship facing households, if official data do not accurately capture changes in the prices of essential goods and services.
“It will be more difficult to interpret the inflation data during the current crisis,” Silvana Tenreyro, an external member of the Bank of England’s monetary policy committee, said earlier this month. “While Covid-19 is still widespread . . . CPI [consumer price index] inflation is not going to be as informative as usual about the balance of supply and demand in the economy.”
The US and the UK have until now relied on visits to physical stores to collect most prices; on-the-ground research also accounts for 40 per cent of France’s inflation index, and 50 per cent of Italy’s. Emerging economies such as India — where researchers usually collect data from more than a thousand markets each month, as well as from more formal businesses — may face even bigger difficulties.
Even countries such as the Netherlands, which collects all prices remotely, face the bigger issue that in many areas of consumption — from air travel to haircuts and eating out — prices are simply unavailable.
For now, statisticians are filling in the blanks as best they can, using web scraping and other methods to collect prices remotely and estimating those that are missing. But estimates will become less reliable the longer lockdowns persist; the US Bureau of Labor Statistics has warned of potential long-term impacts on its inflation figures if it is unable to conduct the consumer expenditure survey it usually uses to calculate the weighting of items in its inflation basket.
The fundamental problem is that the baskets of goods and services statisticians track no longer match household spending patterns.
In the UK, for example, meals out, package holidays and recreational or cultural services make up more than 15 per cent of the CPI basket. Even when lockdowns lift, people will spend less in these areas for some time.
“We often think of inflation as measuring how much extra money we need to maintain a constant standard of living . . . In today’s circumstances, there is a much weaker relationship between what is happening to prices and what we might need to maintain the same standard of living we enjoyed last year,” said Peter Levell at the UK’s Institute for Fiscal Studies.
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Ms Tenreyro argued that the crisis could amplify existing trends that have pushed inflation down, if it accelerated the shift to online retail, where price-setting is more efficient, and if more widespread homeworking put pressure on commercial rents.
In the short term, gaps in the data make it harder for policymakers to track the extent of hardship among low-income households at a time when many are under intense strain. For example in the UK, food price inflation may be understated, because, while prices are available online, many stores are offering fewer discounts than usual.
Tim Graf, a strategist at State Street Global Markets, said the bank’s Price Stats series, which tracks online prices in 22 countries, was faster-moving than official data — and showed pronounced food price inflation in several European countries in recent weeks.
