The news this week that core consumer prices fell by 0.4% m/m in April has added to the speculation that the pandemic could tip the US into a Japan-style deflation. Rather than reflecting a decline in the prices of a broad range of goods and services, however, the drop in core prices in April was due to some very big falls in a limited number of components. Meanwhile, the April retail sales and industrial production data suggest that the balance of risks to our long-standing below-consensus forecast that second-quarter GDP will contract at a 40% annualised pace probably now lie to the downside.
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