The deflation 'scare' operates on two levels. One is the level of intellectual argument, the other the day to day data. Today's news, in this second sense, is definitely 'deflationary'.
Consumer prices excluding energy and food eked ahead at the slowest year-over-year pace in 37 years in April, while the once robust housing market cooled during the month, according to government data that fanned fears of the danger of deflation. The core Consumer Price Index rose at just a 1.5 percent pace for the 12 months ended in April, its slowest clip since March 1966, the Labor Department said on Friday. For the month, the core Consumer Price Index (CPI) was flat for a second straight month -- the first time that has happened since 1982. The overall CPI fell 0.3 percent in April, but like the big drop in wholesale prices reported a day earlier it was driven down by a big drop in oil prices since the start of the Iraq war eased worries of supply disruptions.
The figures raised the prospect of a further slowing in core consumer prices that has investors fearing that deflation, or an extensive decline in prices across the economy, could ensnare the U.S. like it has Japan.Last week the Federal Reserve said in its policy statement it was worried about a substantial decline in inflation, words that stoked worries of deflation and expectations the central bank could respond next month with another reduction in official interest rates. The federal funds rate already stands at four-decade low of 1.25 percent. "The CPI number shows that the economy is still clearly in an environment of broad disinflation. Whether this will be enough to move the Fed to cut rates is still a huge question mark," said Laura Rhame, senior economist at Brown Brothers Harriman in New York.
"This disinflation factor is adding a whole new level of uncertainty in the U.S. economic outlook," she said. Since the Fed's statement, an array of figures have shown the economy struggling with at best meager growth that has done little to absorb the excess production capacity that tends to drive down the pace of inflation until growth picks up robustly. The Fed said on Thursday capacity utilization at factories, utilities and mines fell to a 20-year low of 74.4 percent in April -- raising the specter of yet more declines in the pace of inflation until strong economic activity returns, analysts said.
The price declines spread almost across the board. Housing prices dipped 0.1 percent, the weakest reading since October 2001 in the immediate aftermath of the Sept. 11 attacks. Apparel costs slid 0.6 percent and are down 3.8 percent from a year ago. New vehicle prices fell 0.4 percent after a 0.2 percent rise in March. Even the once roaring housing market cooled in April as housing starts fell a surprisingly hefty 6.8 percent, largely due to a decrease in groundbreaking for new multifamily homes, the Commerce Department said. But the housing news wasn't entirely bad. Permits, an indicator of builder confidence in future sales, rose 1.2 percent on the month. A third government report showed real average weekly earnings fell 0.3 percent in April after a 0.1 percent gain in March, the Labor Department said. On a year-over-year basis, earnings rose at just a 0.2 percent rate.
Source: Reuters News