Deflation is a risk in the current crisis. For most of us it is but a concept. Yet, the threat is real. Last month, the US CPI declined at an annualized rate of –0.74%, the first time since the 1950’s that we recorded a negative number. Doug Short’s chart shows that before WWII, deflation was part of the normal economic cycles.
Consumer prices fell 0.7% compared to one year ago, the largest 12-month decline since June 1955. It’s also significantly under the 2% annual rate of inflation that most Fed officials think is consistent with their dual mandate of price stability and maximum employment.
Still, data for April continue to suggest the risk of sustained price declines known as deflation remains remote, since the drops are still mostly centered in energy and energy-related products.
On a monthly basis, the consumer price index was unchanged in April from March, the Labor Department said Friday. That was in line with expectations of economists surveyed by Dow Jones Newswires.
However the core CPI, which excludes food and energy prices, jumped 0.3% last month, the largest increase since June 2008 and well above economist expectations for a 0.1% increase. A 9.3% rise in tobacco prices generated about 40% of the core CPI increase as a federal excise tax kicked in. It was the second-straight month that tobacco lifted the core index.
In a policy statement last month, Fed officials said they expect inflation "will remain subdued" and that the Fed "sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term." That view appears supported by the latest CPI data.
The less-volatile core CPI index was up 1.9% from one year ago and increased at a 2.5% annual rate over the last three months, which is more in line with the Fed’s preference than the headline figures, suggesting deflation hasn’t gripped the U.S. economy as it did Japan’s earlier this decade.
According to Friday’s report, energy prices fell 2.4% in April from March, and were down 25.2% over the last 12 months. Gasoline prices fell 2.8% last month, while food prices slid 0.2%.
Transportation prices, meanwhile, decreased 0.4%. Airline fares tumbled 1.5%, though new vehicle prices increased 0.4%. Still, auto prices are down 0.2% from a year ago, reflecting the severe downturn in that sector.
Housing, which accounts for 40% of the CPI index, fell 0.1%. Rent increased 0.2%, and owners’ equivalent rent rose 0.1%. Household fuels and utilities prices slid 1.7%. Lodging away home advanced 0.5%, partially reversing some of its steep price decline in previous months.
Medical care prices increased 0.4%, while clothing prices fell 0.2%.