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Tame CPI Eases Deflation Fears

Deflation worries may have receded a bit with the release of the Consumer Price Index numbers for April. The seasonally adjusted CPI for all urban consumers was flat in April, after falling 0.1% in March, the Labor Dept. reported on May 15. The unadjusted CPI was down 0.7% over the last 12 months, primarily due to a large drop in energy prices.

The year-over-year declines in the CPI are the first since 1955, the Labor Dept. said. However, the core CPI—which excludes volatile fuel and energy prices—rose 0.3% after a 0.2% rise in March, slighter higher than the 0.1% analysts expected. More than 40% of that, the Labor Dept. noted, was due to an increase in federal tobacco taxes. The annual rate in core inflation increased to 1.9%, from 1.8% previously.

Analysts at Action Economics said "the restrained but upward trajectory for most U.S. prices in 2009 is welcome" at the Federal Reserve, where policymakers are balancing risks of near-term deflation with longer-term inflation. "Though commodity price firmness into mid-2009 is fueling the longer-term fears of inflation hawks, we see the Fed sustaining its 0.0% to 0.25% Fed funds rate target through 2009, as the Fed adheres to its pledge to keep rates 'exceptionally low' for 'an extended period.' "

"Few Signs of a Deflation"

The energy index fell for the second straight month, down 2.4% after declining 3.0% in March. Motor fuel, fuel oil, natural gas, and electricity all declined in April. The food index declined as well, falling 0.2% in April after a 0.1% decrease in March. Year-over-year, the food index has increased 3.3%, the Labor Dept. said.

Paul Ashworth, senior U.S. economist at Capital Economics in Toronto, noted that despite the moderation in headline consumer prices, "there are few signs of a deflation developing in core prices, quite the opposite in fact." He noted price pressures on core inflation from increases in vehicle prices, hotel room rates, and medical care costs.

"Nevertheless, with the unemployment rate and the output gap both headed for 10%, there will be an awful lot of downward pressure on prices over the next couple of years," Ashworth said. We still expect core inflation to moderate sharply in the second half of this year and through 2010.

Separately, the Fed said U.S. industrial production fell in April by 0.5%, the smallest amount in six months.

Mintz is news editor for in New York.

Mintz is news editor for in New York.

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