WASHINGTON – A measure of U.S. consumer prices fell in May by the most since December 2008, pulled down by a plunge in gas prices. Excluding volatile food and energy costs, prices rose only modestly.
The Labor Department said Thursday that the consumer price index dropped 0.3 per cent. Gas prices sank 6.8 per cent, also the most since December 2008. Food costs were unchanged.
Mild price increases give consumers some relief at a time when unemployment is high and wage gains are meagre. Lower inflation also gives the Federal Reserve more leeway to keep interest rates low.
So-called “core” prices, which exclude food and energy, rose 0.2 per cent for the third straight month.
Over the past 12 months ending in May, consumer prices rose 1.7 per cent, much less than the pace for the 12 months that ended in April. Core prices have risen 2.3 per cent in the past year, the same as for the 12 months ending in March and April. That’s close to the Fed’s 2 per cent target for inflation.
Some economists said the slowdown in overall price increases makes it more likely the Fed will announce some new step to boost the still-weak economy when it meets next week. If inflation were threatening to accelerate, Fed policymakers might feel compelled to raise interest rates or take other steps to fight rising prices. But with inflation tame, the Fed can focus on stimulating growth.
Most analysts think an extension of a current Fed program to swap short-term Treasury securities for bonds with longer maturities, known as “Operation Twist,” is the most likely step. The goal of that program has been to further lower long-term interest rates to encourage borrowing and spending.
“The odds of an extension of Operation Twist are growing with each passing poor data point,” Dan Greenhaus, chief economic strategist at BTIG LLC, said in a note to clients.
Steady increases in rents for homes and apartments are pushing up core prices. Rents are rising as more people forgo homeownership and rent instead.
Core prices were also driven up by a sharp increase in the cost of used cars and trucks. The costs for medical care, clothing and air fares also rose.
Gas prices have tumbled 41 cents after peaking April 6. Prices at the pump averaged $3.53 on Thursday, according to AAA. That’s down 20 cents from a month earlier.
Food prices were flat because a small rise in restaurant prices offset a decline in grocery costs. The price of bread fell 0.2 per cent. The cost of meat, fish and eggs dropped 0.5 per cent. And dairy prices declined 0.4 per cent.
The decline in gas and energy costs caused a measure of U.S. wholesale prices to drop by the most in nearly three years in May. Outside that drop, wholesale prices barely rose. Modest wholesale inflation reduces pressure on manufacturers and retailers to raise prices. That helps keep consumer prices stable.
Falling prices have begun to boost Americans’ inflated-adjusted pay. Inflation-adjusted earnings rose 0.3 per cent in May, the government said, only the second gain this year. That occurred because average hourly earnings rose slightly while prices dropped.
Over the past 12 months, however, inflation-adjusted hourly earnings dipped 0.1 per cent.
Without more jobs or higher pay, consumers could be forced to cut back on spending later this year. Consumer spending is critical because it accounts for 70 per cent of economic activity
A small amount of inflation can be good for the economy. It encourages businesses and consumers to spend and invest money sooner rather than later, before inflation erodes its value.
The economy is growing but at a sluggish pace. That is keeping a lid on price increases. Slow growth makes it harder for consumers and businesses to pay higher costs. The economy expanded at just a 1.9 per cent annual rate in the January-March quarter.