Prices are falling at an alarming rate

A woman walks past a closed barber shop, Wednesday, May 6, 2020, in Cleveland. (AP Photo/Tony Dejak)

US consumer prices declined for the second consecutive month in April, the Labor Statistics Office reported Tuesday. Prices fell 0.8% on a seasonally adjusted basis in April, marking the biggest drop since December 2008.

It is an alarming drop, mainly driven by the drop in gasoline and energy prices. But excluding volatile food and energy, prices are still down 0.4%. This is the biggest monthly decline in the so-called core consumer price index since BLS started tracking data in 1957.

Falling prices may seem like a good thing, but economists agree that deflation – the opposite of inflation – would be bad news.

When prices go down because people don’t buy products, sometimes manufacturers can’t charge enough to make the product they’re trying to sell. This means that they will stop producing those products and lay off workers. This can begin a vicious cycle where demand continues to decline as more people lose their jobs.

Deflation is not yet here: prices have risen 0.3% in the past 12 months. But if home orders continue to plunge the economy into a severe recession, lower prices could aggravate the damage.

The surprising decline of oil

The collapse in gas prices was caused by a crisis in demand in the oil market, combined with an inappropriate moment for a major price war between Saudi Arabia and Russia.

The oil market is struggling with falling demand as people cancel their travel plans, work from home or lose their jobs. Yet oil companies continued to produce, while the limited storage capacity of oil barrels dragged the price of an oil futures contract into negative territory last month.

Americans felt the effect of the pump as the BLS petrol price index plummeted 20.6% in April. The overall energy index fell by 10.1%.

Prices for clothes, cars and airline tickets also drop

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Although the collapse in energy prices accounted for most of the falling prices in the past month, it has not been the only area where prices have fallen.

Prices for clothing, car insurance, airline fares and out-of-home accommodation have helped drag the overall index down as demand for these goods and services has disappeared.

As most of America continues to experience some restrictions, the amount of holiday spending and many discretionary items has decreased. Economists fear that this type of spending may take some time to recover as consumers remain cautious even after the restrictions are lifted.

Food and rental prices skyrocket

Meanwhile, food prices have risen higher, with the home-made food category having experienced its largest increase since February 1974, rising by 2.6%.

The price index for eggs has gone up by more than 16%, the biggest increase for any food.

Rents and medical bills also rose slightly.

Economists expected the coronavirus crisis to have a largely deflationary effect. The April data are proof of this. This is bad news for Federal Reserve policymakers, who like to keep inflation around 2%, widely recognized as the ideal balance for the U.S. economy.

“Even when the economy reopens, core inflation will likely drop below 1% in the coming year due to high unemployment and low commodity prices,” said Sal Guatieri, Senior Economist at BMO.

The Fed has unleashed a huge package of monetary policy stimuli to stabilize markets and help the economy through this crisis.

Normally, such a monetary action should increase inflation. But US economist Oxford Economics, Gregory Daco, said that, given the direction of prices, “a spike in inflation is the least of our concerns.”

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