U.S. April Consumer Prices Fall 0.3%; Core Unchanged
Washington, May 16 (Bloomberg) -- U.S. consumer prices in April fell the most in 18 months due to falling costs for gasoline, motor vehicles and clothing, a government report showed.
The consumer price index declined 0.3 percent last month after a 0.3 percent increase in March, the Labor Department said. Excluding volatile food and energy costs, the index was unchanged for a second month, marking the first time core inflation failed to rise in consecutive months since November-December 1982.
Consumer demand that's rising at the slowest pace in a decade is forcing companies, which are struggling to boost profits, to keep a lid on prices. That helps explain why Federal Reserve policy makers have signaled their concern about a sustained drop in prices.
This ``is taking the Fed way below the target that they would deem appropriate,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``You could make the case that this justifies'' a rate cut at next month's policy meeting.
Consumer prices excluding food and energy have increased 1.5 percent in the 12 months that ended in April, the smallest rise since 1966.
Economists had expected a 0.1 percent decrease in the April consumer price index, based on the median of 63 forecasts in a Bloomberg News survey. The April decrease was the largest since October 2001. Core prices were forecast to rise 0.1 percent.
So far this year, consumer prices are rising at a 2.8 percent annual pace compared with a 3.4 percent increase during the same period in 2002. Core inflation is rising at a 0.6 percent rate compared with 2.1 percent pace in the same four months last year.
Falling Energy Costs
The fall of Baghdad last month signaled the war with Iraq would not be prolonged, causing oil prices to fall as fears of supply disruptions faded.
Energy prices, which account for about a 14th of the index, fell 4.6 percent in April, the most since November 2001, after rising 4.6 percent the prior month. Gasoline prices fell 8.3 percent in April, while fuel oil costs declined 14.9 percent, the biggest decrease since February 1990.
``Lower energy prices should put more money in consumers' pockets, but I doubt the cash will stay there very long,'' said Oscar Gonzalez, an economist at John Hancock Financial Services Inc. in Boston, before the report. ``Deflation is a risk, but as demand rises, prices will tick up as well.''
`Unwelcome'
Fed policy makers last week said the possibility of an ``unwelcome substantial fall in inflation, though minor'' was greater than a pickup in prices and that meant there was a great risk the economy would be weaker than stronger in coming months. Central bankers held the benchmark U.S. interest rate at 1.25 percent, the lowest in almost 42 years.
Deflation, or a sustained and broad decline in prices, ``is becoming a concern because growth has been below potential for so long,'' said Martin Mauro, a senior economist at Merrill Lynch & Co. in New York.
Most economists say the economy can grow between 3 percent and 4 percent without risking a pickup in inflation. Growth hasn't exceeded 3 percent at an annual pace for consecutive quarters since the last six months of 1999.
Economists at Merrill Lynch expect central bankers will cut the benchmark rate by a quarter percentage point following their two-day meeting ending June 25 because of muted price increases and weak growth.
Economic Growth
The economy grew at a 1.6 percent pace in the first three months of this year as consumer spending, which accounts for 70 percent of the total, rose at a 1.4 percent rate. That matched the weakest increase since the first quarter of 1993.
To spur demand, some companies are offering incentives and discounts. The cost of all goods including cars, apparel and food fell 1 percent last month and are 0.8 higher in the last year. New car prices fell 0.4 percent last month after rising 0.2 percent in March.
General Motors Corp., the world's largest automaker, last month led all automakers with incentive spending of $3,871 per vehicle, up 1.5 percent from March. Spending averaged $3,286 at Ford Motor Co. and $3,294 at DaimlerChrysler AG's Chrysler unit.
The auto industry has been in a ``deflationary period for two years on pricing,'' Michael Jackson, chairman and chief executive officer of AutoNation Inc., the largest U.S. retailer of new and used cars, said last week in an interview. ``The burden has been borne by the manufacturers, and that's put tremendous pressure on their profit and cost equations. In better economic times, there's going to have to be more pricing power.''
Apparel
Clothing prices fell 0.6 percent in April after a 0.4 decrease. The costs of personal computers fell 1.6 percent and are down 18.3 percent in the last 12 months.
Food prices, which account for about a fifth of the index, fell 0.1 percent in April after increasing 0.2 percent the month before. Last month's decrease was due to lower prices for fruits and vegetables.
The CPI is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices consumers pay for services, ranging from medical visits to airline fares and movie tickets. Goods, including food, clothing, autos and appliances, make up the rest.
Service prices rose 0.1 percent last month, the smallest gain since October 2001, and are up 3.2 percent over the last year.
The cost of medical care rose 0.2 percent for a second straight month. Housing costs, which include some energy costs and account for one-third of the index, fell 0.1 percent in April after rising 0.4 percent.
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