Consumer Prices Fall As Deflation Now Becomes A Concern

(FreedomJournal.org)- Prices are dropping across the country.
And while many consumers may think that is a good thing, it’s a bad sign for the overall economy.
For the second straight month, consumer prices in the U.S. declined in April, the Bureau of Labor Statistics said on Tuesday. On a seasonally adjusted basis, prices fell by 0.8% in April, which marks the largest month-to-month drop since December of 2008.
The majority of that drop came from energy and gasoline prices that have tumbled considerably during the coronavirus pandemic. Taking those categories out, though, prices still fell by 0.4% in what is commonly referred to as the core consumer price index. That drop is the largest in history since the BLS started tracking that data back in 1957.
Deflation would be a very bad thing for the country, economists say, although that isn’t here just yet. After all, over the last 12 months, prices have still risen 0.3%, even factoring in the devastation caused by the coronavirus pandemic.
Continued stay-at-home orders could further lower prices, though, which could result in long-term negative effects, economists have said.
Prices for airline fares, car insurance and apparel all fell sharply last month. Spending on a lot of discretionary items has gone down considerably with so many people losing their jobs.
Even as coronavirus-related restrictions are lifted, economists are concerned that this spending may take a while to return, as people remain cautious with their spending to protect the money they have.
Oil has been on a stunning decline recently, both because of the significant decrease in demand due to stay-at-home orders, and because of a price war that raged between Russia and Saudi Arabia almost at the same time. The price on oil futures even dropped below $0 in April, as capacity for barrels of oil that need to be stored was drying up.
At the same time, prices for food increased over the last month. The category for “food at home” increased a significant 2.6% in April, the highest jump since back in February of 1974. The food item with the biggest increase was eggs, which jumped more than 16%.
Other categories of spending that experienced increases were rent for housing as well as medical costs, both of which increased slightly.
While the Federal Reserve likes to maintain inflation at a rate of 2%, that is going to be difficult to do because of the effects of the coronavirus. Economists believe the pandemic is likely to have a longer-lasting deflationary effect than many would hope.
As a senior economist at BMO, Sal Guatieri, said:
“Even as the economy re-opens, core inflation is likely headed below 1% in the coming year in the face of high unemployment and low commodity prices.”
The Fed has been very aggressive with its monetary policy to combat the fallout from the coronavirus pandemic, including near zero interest rates. That would normally be expected to increase inflation.
But as Gregory Daco, the chief U.S. economist for Oxford Economics, said recently, “a surge in inflation is the least of our worries.”