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.
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 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.
Prices for clothes, cars and airline tickets also drop
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%.
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.
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.”