Bloomberg News

Consumer Prices in U.S. Fell in May by Most in Three Years

June 14, 2012

Consumer Prices in U.S. Declined in May by Most in Three Years

Cheaper energy costs may provide some relief for Americans against a backdrop of moderating job and wage gains that has slowed consumer spending. Photographer: David Paul Morris/Bloomberg

The cost of living in the U.S. fell in May by the most in more than three years as fuel prices retreated, buttressing Federal Reserve projections that cheaper commodities will help reduce inflation.

The consumer-price index declined 0.3 percent, more than forecast and the biggest drop since December 2008, after no change the prior month, the Labor Department reported today in Washington. Economists projected a 0.2 percent decrease, according to the median estimate in a Bloomberg News survey. The so-called core measure, which excludes more volatile food and energy costs, increased 0.2 percent for a third month.

Cheaper energy costs may provide some relief for Americans against a backdrop of moderating job and wage gains that has slowed consumer spending. With inflation cooling, Fed policy makers also have more flexibility to take further action to bolster U.S. economic growth.

“The drop in the headline is encouraging for the Fed because it shows gasoline prices are less of strain on consumers’ incomes, which means they can pick up spending in the summer months,” said Jeffrey Greenberg, an economist at Nomura Securities International LLC in New York, who correctly forecast the decline in prices. “Unemployment is the Fed’s big concern. They aren’t worried about inflation going out of control.”

Estimates from 78 economists ranged from a decrease of 0.6 percent to an increase of 0.2 percent.

Another Labor Department report showed first-time claims for jobless benefits unexpectedly climbed by 6,000 to 386,000 in the week ended June 9 from a revised 380,000 the prior week that was more than first estimated. Economists projected claims would fall to 375,000, according to the median estimate.

Stock Futures

Stock-index futures were little changed after the labor market figures. The contract on the Standard & Poor’s 500 Index maturing in September rose 0.1 percent to 1,310.2 at 8:47 a.m. in New York.

Consumer prices increased 1.7 percent in the 12 months ended in May, the smallest 12-month gain since January 2011, the report showed.

Core prices were up 2.3 percent for year through May, matching the gains for the 12 months ended in April and March.

The drop in prices allowed Americans to stretch their paychecks further in May, another Labor Department report showed today. Hourly earnings adjusted for prices climbed 0.3%, the biggest increase since April 2010. Real wages were down 0.1 percent over the past 12 months.

Cheaper Fuel

Today’s data showed energy costs decreased 4.3 percent from a month earlier, the largest decline since December 2008. Gasoline prices slumped 6.8 percent, and the costs of natural gas and fuel oil also fell.

Compared with May 2011, energy costs fell 3.9 percent, the first year-over-year decrease since October 2009.

Food costs were unchanged as gains in fruit and vegetables were offset by cheaper beverages, dairy products and meats.

The increase in the core measure was driven by increases in costs for shelter, medical care, cars and airfares. Medical care costs advanced by the most since October.

Shelter costs rose 0.2 percent, and owners’ equivalent rent increased 0.1 percent. Prices for stays at hotels and motels climbed 1.8 percent.

Fed policy makers, who said they anticipated the run-up in energy costs would subside, aim for 2 percent inflation as part of their dual mandate of stable prices and maximum employment. Their preferred price gauge, issued by the Commerce Department and tied to consumer spending, rose 1.8 percent in the 12 months ended in April, the smallest gain in more than a year.

Fed Officials

Fed Vice Chairman Janet Yellen said last week she sees more scope for easing, while San Francisco Fed President John Williams, a voting member of the FOMC this year, called on policy makers to stand ready to act should the recovery falter.

“Substantial resource slack in U.S. labor and product markets should continue to restrain inflationary pressures,” Fed Chairman Ben S. Bernanke told Congress’s Joint Economic Committee last week. With a “subdued” inflation outlook, high unemployment and “strains in global financial markets,” the central bank anticipates it will keep its benchmark lending rate near zero though late 2014, he said.

Labor Department figures showed June 1 that U.S. employers in May added the fewest workers in a year, further restraining consumers’ buying power. Average hourly earnings rose 1.7 percent in May from the same month last year, the smallest increase since December 2010.

Fed Meeting

The Federal Open Market Committee, which sets the course of central bank policy, meets in Washington next week. Inflation below their target gives them more room to ease should they choose to address the cooling U.S. expansion and the widening debt crisis in Europe.

Inflation expectations have “definitely come down,” David Tehle, chief financial officer of Dollar General Corp. (DG:US), said during a June 4 earnings call. The Goodlettsville, Tennessee- based dollar-store chain anticipates 0.5 percent inflation for the full year, compared with 2 percent in the final three months of 2011, Tehle said.

Dollar General expects no apparel inflation this year and sees broad slowing in commodity prices, Chief Executive Officer Rick Dreiling said during the call.

A Labor Department report yesterday showed prices paid to producers dropped 1 percent in May, the most since July 2009. Import prices in the U.S., reported June 12, dropped 1 percent.

The CPI is the broadest of the three monthly price measures from the Labor Department because it includes goods and services. About 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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