US consumer prices post largest drop in five years

WASHINGTON: US consumer prices fell by the most in more than five years in March and further decreases are likely as the novel coronavirus outbreak suppresses demand for some goods and services, offsetting price increases related to shortages resulting from disruptions to the supply chain.

With the country virtually at a stand-still, the economy rapidly contracting and millions unemployed as state and local governments adopt stiff measures to control the spread of Covid-19, the respiratory illness caused by the coronavirus, economists are predicting the disinflationary trend will persist for a while or even a short period of outright deflation.

“The big concern right now is deflation,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh. “Deflation is likely to take hold over the next few months as businesses slash prices in response to much lower demand from the coronavirus outbreak and associated restrictions on movement.”

The Labour Department said yesterday its consumer price index dropped 0.4 per cent last month amid a tumble in the cost of petrol, and record decreases in hotel accommodation, apparel and airline ticket prices. That was the biggest drop since January 2015 and followed a 0.1pc gain in February. In the 12 months through March, the CPI increased 1.5pc, the smallest advance since February 2019, after accelerating 2.3pc in February.

Economists polled by Reuters had forecast the CPI dropping 0.3pc in March and climbing 1.6pc year-on-year.

Deflation, a decline in the general price level, is harmful during an economic downturn as consumers and businesses can delay purchases in anticipation of lower prices. It can also distort monetary policy, the labour market and signals from stock and real estate prices, economists say. Economists believe the economy entered recession in March.

The National Bureau of Economic Research, the private research institute regarded as the arbiter of US recessions, does not define a recession as two consecutive quarters of decline in real GDP, as is the rule of thumb in many countries. Instead, it looks for a drop in activity, spread across the economy and lasting more than a few months.

The Federal Reserve has adopted extraordinary measures to cushion the economy’s free-fall. President Donald Trump last month signed a historic $2.3 trillion package to aid businesses and workers. A record 16.8 million people have applied for unemployment benefits in the last three weeks. The unemployment rate is expected to top 10pc in April.

Economists said it was unlikely these massive stimulus measures would spark inflation, noting that price pressures remained low during the Great Recession and after despite the US central bank pumping money into the economy through extensive bond buying programs.

Restaurants, bars and other social venues have been shuttered. Clothing retailers have also closed shop as have some manufacturers, while transportation has been drastically scaled back. Fears of a sharp global recession and an oil price war between Saudi Arabia and Russia have led to a collapse in crude prices. This is expected to offset price increases caused by bottlenecks in the supply chain.

Excluding the volatile food and energy components, the CPI dipped 0.1pc in March, the first drop since January 2010. The so-called core CPI had increased 0.2pc for two straight months.

Source: http://www.gdnonline.com/Details/799549/US-consumer-prices-post-largest-drop-in-five-years