U.S. Inflation at 44-Year Low as Retail Prices Fall

U.S. Inflation at 44-Year Low as Retail Prices Fall
By CHRISTINE HAUSER
Copyright by The New York Times
Published: May 19, 2010
http://www.nytimes.com/2010/05/20/business/economy/20econ.html?hp


Consumer prices fell in April for the first time since early last year, and inflation rose at its slowest rate since the 1960s, a new government report said.

Consumer prices over all fell in April by 0.1 percent, the Labor Department said in its monthly report Wednesday. The decline was the first since March 2009. Prices rose by 0.1 percent in March 2010.

The downturn was pressured by a decline in energy prices, especially for gasoline and natural gas, the report said. Energy prices fell by 1.4 percent in April, the department said.

Food prices rose 0.2 percent, mostly because of higher costs for meat, poultry, fish and eggs.

But when the volatile prices for food and energy were subtracted, the core index for consumer prices remained flat, as they did in March. Over the 12-month period that ended in April, the core index was 0.9 percent, which economists said was the lowest it has been since the 1960s.

Other costs that fell in that period included housing, down 0.7 percent, and apparel, down 0.9 percent, the largest decline of all the non-energy components.

“I think what you are seeing is a continuation of a very soft trend,” said Michael Feroli, chief United States economist at JPMorgan Economics. “And there is no evidence that it is about to turn around any time soon.”

Altogether, the figures suggested that the government would be under no pressure to raise benchmark interest rates to curb inflation.

Joshua Shapiro, the chief United States economist for MFR, said that core inflation pressures remained “benign” and would remain so throughout the middle of next year, giving the Federal Reserve leeway to keep rates where they are.The Consumer Price Indexhas increased 2.2 percent in the last year, and some costs have risen. The costs for fuel oil rose 2.3 percent in April. The price of medical care and used vehicles also rose.

The report suggested that government stimulus efforts had not spurred the undesired effect of inflation.

Subdued prices suggest that a more pressing concern could be deflation, which occurs when weak demand causes prices to fall. But whether deflation arises depends on the strength of the economic recovery and whether demand can remain strong even as government stimulus efforts expire.

“I don’t think it’s a major risk,” said Mr. Shapiro. “I think that if the economy were weaker, then it would be a concern. But I think we have enough demand to keep things on an even keel.”

Mr. Feroli said that if the economy continued to get closer to deflation, there was the risk that debt service burdens could go up. He said he thought that from the Federal Reserve’s perspective, “the best inflation is between 1.5 and 2 percent, and you are below that and moving further down.”

“I think if the economy continues to click along here we should escape any problems from this,” Mr. Feroli said. “I think that is the baseline view. Hopefully demand continues to grow and that will keep prices supported.”

The unfolding of the debt crisis in Greece along with concerns about the economic recovery in Europe contributed to a stronger dollar, and that also exerted deflationary pressure in the United States, according to Gregory Daco, the United States economist for IHS Global Insight.

“This month’s low reading of the core inflation index is a clear indication that the Fed should continue to promote a very accommodative monetary policy stance,” said Mr. Daco in a research note. “With no signs of inflation on the horizon, the Fed should continue to support the economic recovery by keeping rates exceptionally low for an extended period of time."