US consumer prices fell for the second consecutive month in April, the Bureau of Labor Statistics reported on Tuesday. Prices fell 0.8% based on seasonal adjustments in April, marking the biggest decline since December 2008.
A fall in prices might sound like a good thing, but economists agree that deflation – the opposite of inflation – will be very bad news.
When prices fall because people don’t buy goods, producers sometimes can’t charge enough to make the product they are trying to sell. That means they will stop making these products and lay off workers. That could start a vicious cycle where demand continues to fall as more people lose their jobs.
Deflation hasn’t come yet – prices have gone up 0.3% over the past 12 months. But if orders remain at home continuing to plunge the economy into a big downturn, lower prices can worsen the damage.
Amazing oil drop
The oil market is struggling with waning demand because people cancel their travel plans, work from home or lose their jobs. But oil companies continue to produce, while limited storage capacity for oil barrels dragged prices for an oil futures contract into negative territory last month.
Clothing, cars, and plane ticket prices also dropped
Although falling energy prices make up a large part of falling prices in the past month, it is not the only area where prices have fallen.
Prices for clothing, car insurance, flight costs and lodging away from home help drag the overall index down as demand for these goods and services disappears.
Because most of America continues to be below some level of lock restrictions, the amount of spending on holidays and many discretionary items has fallen. Economists worry that spending of this kind may take time to recover because consumers remain cautious even after restrictions are lifted.
Food and rental prices soared
Meanwhile, food prices rose higher, with the food category at home posting the biggest increase since February 1974, up 2.6%.
Rent and medical expenses increased slightly too.
Economists expect the coronavirus crisis to have a large deflationary effect. April data is proof. That’s bad news for policy makers at the Federal Reserve, who likes to keep inflation at around 2% – widely accepted as an ideal balance for the US economy.
“Even when the economy reopens, core inflation is likely to go below 1% in the coming year in the face of high unemployment and low commodity prices,” said Sal Guatieri, Senior Economist at BMO.
Usually, such monetary actions are expected to increase inflation. But the head of Oxford Economics, US economist Gregory Daco said that with price direction, “the surge in inflation is the least of our worries.”