WASHINGTON – A plunge in the cost of gas drove down a measure of U.S. consumer prices last month by the most since December 2008. Excluding the drop in fuel costs, prices were largely unchanged.
The consumer price index fell 0.4 per cent in April from March, the Labor Department said Thursday. The main reason the index fell was that gas prices plunged 8.1 per cent.
For the 12 months that ended in April, overall prices rose 1.1 per cent — the smallest year-over-year increase in 2 1/2 years.
Excluding volatile energy and food costs, “core” prices ticked up 0.1 per cent last month. Core prices have risen only 1.7 per cent in the past 12 months. That’s just below the Federal Reserve’s 2 per cent inflation target.
Scant inflation is allowing the Fed to continue its extraordinary efforts to stimulate the economy. Worries about lower inflation or even deflation might push the Fed to step up its low interest-rate policies to stimulate more borrowing and spending and push prices higher.
Deflation is a destabilizing cycle in which prices and wages fall steadily. It can slow economic growth.
Unusually low inflation means consumers can stretch their paychecks and buy more goods and services. But if it were to fall further, it could stoke fears of deflation.
“Subdued demand means that core inflation is likely to edge lower, as retailers will be forced to pass previous falls in raw material costs onto customers,” Paul Dales, an economist at Capital Economics, said in a note to clients. “The Fed may soon put more emphasis on fading inflation trends.”
A little inflation can be good for the economy, because it encourages businesses and consumers to spend before prices rise further.
Aside from sharp swings in gas prices, consumer and wholesale inflation has been mild this year. The combination of modest economic growth and high unemployment has kept wages from rising quickly. That’s made it harder for retailers and other firms to raise prices.
The average national price for a gallon has fallen since reaching a peak this year of $3.79 on Feb. 28. The average price was $3.60 a gallon on Thursday, according to AAA.
The Fed has said it will keep the short-term interest rate it controls near zero at least until the unemployment rate falls below 6.5 per cent, as long as the inflation outlook remains mild.
It is also buying about $85 billion a month in Treasury and mortgage bonds to try to keep longer-term rates low. That’s intended to encourage borrowing and spending, which drives economic growth.
Many economists expect the Fed to begin to taper those purchases by the end of the year, particularly if hiring stays healthy. But too-low inflation could encourage the Fed to maintain or even step up the pace of its purchases.