U.S. consumer prices post largest drop in five years

WASHINGTON (Reuters) - U.S. 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 Labor Department said on Friday its consumer price index dropped 0.4% last month amid a tumble in the cost of gasoline, and record decreases in hotel accommodation, apparel and airline ticket prices. That was the biggest drop since January 2015 and followed a 0.1% gain in February. In the 12 months through March, the CPI increased 1.5%, the smallest advance since February 2019, after accelerating 2.3% in February.

Economists polled by Reuters had forecast the CPI dropping 0.3% in March and climbing 1.6% 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 labor 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 U.S. 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.