U.S. consumer prices record largest drop in five years
Deflation a concern for some economists
WASHINGTON • 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 standstill and the economy rapidly contracting 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 a period of disinflation or even 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 per cent last month amid a tumble in the costs of gasoline, hotel accommodation, apparel and airline tickets. That was the biggest drop since January 2015 and followed a 0.1 per cent gain in February. In the 12 months through March, the CPI rose 1.5 per cent after increasing 2.3 per cent in February.
Economists polled by Reuters had forecast the CPI dropping 0.3 per cent in March and climbing 1.6 per cent year-on-year.
The general price level decline is expected even as the
Federal Reserve has adopted extraordinary measures to stop the economy’s free- fall. President Donald Trump last month signed a historic US$2.3 trillion package to aid businesses and workers.
“The disinflationary impulse, along with the great disruption in economic and financial market activity, is a key reason why the Fed is unleashing vast new monetary policy stimulus,” said Gregory Daco, chief U. S. economist at Oxford Economics in New York.
Restaurants, bars and other social venues have been shuttered. Clothing retailers have closed shop as have some manufacturers, while transportation has been scaled back, leaving millions of Americans unemployed.
Fears of a sharp global recession and an oil price war between Saudi Arabia and Russia have led to a collapse in crude prices. This is expected to offset price increases caused by bottlenecks in the supply chain.
The widespread business closures impacted March’s CPI report, with data collection by personal visit suspended on March 16, the Labor Department said. It said data collection last month was also impacted “by the temporary closing or limited operations of certain types of establishments,” leading to “an increase in the number of prices being considered temporarily unavailable and imputed.”
That resulted in many indexes being based on smaller amounts of collected prices than usual, and a small number of indexes that are normally published were not published in March.
The dollar was l ittle changed against a basket of currencies. Wall Street and the U. S. Treasury market are closed for Good Friday.
Excluding the volatile food and energy components, the CPI dipped 0.1 per cent in March, the first drop since January 2010. The so- called core CPI had increased 0.2 per cent for two straight months. Underlying inflation fell in March also as prices for new motor vehicles declined. In the 12 months through March, the core CPI rose 2.1 per cent after increasing 2.4 per cent in February.
The Fed tracks the core personal consumption expenditures (PCE) price index for its 2 per cent inflation target. The core PCE price index increased 1.8 per cent on a year- on- year basis in February after rising 1.7 per cent in January.
March’s core PCE price index data will be released at the end of the month. The closure of businesses could, however, impact the collection of inflation data in the coming months, making the reports unreliable.