[News Terms] Stalled US 'Disinflation' Dampens Hopes for Interest Rate Cuts

Published 11 Apr.2024 16:26(KST)

"The disinflation process continues along the generally expected path of being somewhat uneven." This is part of a phrase included in the minutes of the March Federal Open Market Committee (FOMC) released by the U.S. Federal Reserve (Fed) on the 10th (local time). This means that the disinflation process is unstable. Disinflation refers to a phenomenon where the price level remains high but the inflation rate itself slows down. For example, looking at the consumer price inflation rate which was 5.0% in 2015, then decreased to 3.5% in 2016 and 2.0% in 2017, the inflation rate each year was above zero, so the price levels of goods and services continued to rise, but the rate of increase slowed from 5.0% → 3.5% → 2.0%. This phenomenon is called disinflation.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed). [Image source=AFP Yonhap News]

This is a different concept from deflation, where prices continuously fall. Simply put, if the year-over-year change rate of the consumer price index remains negative, it is deflation; if it remains positive but the growth rate gradually decreases, it is disinflation. The term disinflation was first used in the UK during the post-World War II global inflation convergence process.

In the economic sector, since disinflation means that the inflation trend has eased, it is generally not considered a major concern if this phenomenon appears in the short term. Especially, a temporary slowdown in inflation caused by supply factors such as falling energy prices or increased productivity is judged to be beneficial to the economy. However, if this continues for a long time, it inevitably burdens the economy. If disinflation continues and further declines in the inflation rate are expected, households and businesses may postpone consumption and investment, which can increase deflationary pressures. In such situations, it is important for economic and monetary authorities to proactively respond with monetary and fiscal policies in advance to prevent economic agents’ inflation expectations from falling further.

Meanwhile, last month, disinflation showed signs of stagnation, strengthening the view that the timing of the U.S. interest rate cuts will be delayed until the second half of the year. According to the Chicago Mercantile Exchange (CME) FedWatch, on that day, the federal funds futures market reflected about a 17% chance that the Fed would cut rates by 0.25 percentage points or more at the June FOMC. This is down from the 57% level the day before and 72% a month ago. The probability of a 0.25 percentage point or more rate cut in July dropped sharply to 41% from 84% the day before.