Deflation likely temporary but slowdown isn’t

Consumer price inflation slipped into negative territory in July. But this probably won’t last more than a quarter or two and has less to do with the health of domestic demand than many think. Inflation in services, the part of the CPI basket most influenced by domestic conditions, has picked up. That makes it harder to blame cyclical headwinds for the current weakness, reinforcing our view that structural factors are playing a bigger role and that most of the slowdown since the start of the pandemic can’t be reversed by policy stimulus.