US consumer prices declined for the second-straight month in April, the Bureau of Labor Statistics reported on Tuesday. Prices fell by 0.8% on a seasonally adjusted basis in April, marking the largest drop since December 2008.
Falling prices might sound like a good thing, but economists agree that deflation — the opposite of inflation — would be very bad news.
When prices fall because people aren’t buying things, manufacturers sometimes can’t charge enough to make the product they’re trying to sell. That means they’ll stop making those products and lay off workers. That can start a vicious circle in which demand continues to fall as more people lose their jobs.
Deflation isn’t here yet — prices have risen 0.3% over the past 12 months. But if stay-at-home orders continue to plunge the economy into a massive downturn, lower prices could exacerbate the damage.
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Oil’s stunning decline
The oil market is struggling with waning demand as people cancel their travel plans, work from home or lose their jobs. Yet oil companies continued to produce, while limited storage capacity for oil barrels dragged the price for one oil futures contract into negative territory last month.
Clothes, cars and airfare prices fall, too
Even though tumbling energy prices made up the majority of falling prices in last month, it wasn’t the only area where prices dropped.
Prices for apparel, car insurance, airline fares and lodging away from home helped drag the overall index down as demand for these goods and services disappeared.
As most of America continues to be under some degree of lockdown restrictions, the amount of spending on vacations and many discretionary items has gone down. Economists worry this kind of spending might take time to recover as consumer remain cautious even after the restrictions lift.
Food and rent prices soar
Meanwhile, food prices climbed higher, with the food at home category recording its biggest increase since February 1974, rising 2.6%.
Rents and medical costs increased slightly as well.
Economists expected the coronavirus crisis to have a largely deflationary effect. The April data is proof of that. That’s bad news for policy makers at the Federal Reserve, who like to keep inflation at around 2% — widely accepted as the ideal balance for the US economy.
“Even as the economy reopens, core inflation is likely headed below 1% in the coming year in the face of high unemployment and low commodity prices,” said Sal Guatieri, Senior Economist at BMO.
Ordinarily, monetary action like that is expected to increase inflation. But Oxford Economics chief US economist Gregory Daco said that given the direction prices are going, “a surge in inflation is the least of our worries.”