Oil price fall sees deflation return to US for first time since 1955
Consumer prices fall 0.4% on an annual basis in March / Fed data shows speed of decline is moderating
Thursday 16 April 2009
Deflation has returned to the US for the first time in more than half a century, taking the pressure off cash-strapped consumers but raising the stakes in the Obama administration's battle to restore economic growth.
Consumer prices were 0.4 per cent lower last month than in March 2008, the first year-on-year drop since August 1955, as the effects of last summer's oil price collapse fed through into energy bills.
The spectre of deflation has haunted monetary policymaking, since a spiral of falling prices, declining wages and collapsing output could leave the US economy in an intractable recession, but economists said yesterday's milestone was far from that nightmare scenario. Excluding volatile food and energy prices, year-on-year inflation was still 1.8 per cent higher than a year ago, only a little below the Federal Reserve's informal "comfort level" of 2 per cent.
"Wages are still growing quite briskly, so injurious or ruinous deflation is a risk rather than a likelihood," said John Lonski, the chief economist at Moody's Investors Service. "What these figures do mean, though, is that it is really premature and unwarranted to argue that all the economic stimulus is going to ignite a surge in prices. I wouldn't take inflation talk seriously unless we are all wrong about the likely severity of the recession and the economic recovery unexpectedly resembles a V shape."
David Buik, a market analyst at BGC Partners in London, said the March deflation may prove only temporary. "The decline in year-on-year terms is all due to the spike upwards and subsequent reversal in energy prices last year – it does not reflect the beginnings of a widespread deflation this year. With oil prices now stable at close to $50 a barrel, there is no near-term prospect of a further substantial decline in energy prices."
Peter Kenny, the managing director at Knight Equity Markets, said the notion that inflation will pick up in the short term is "completely out of the picture". He said: "We're no longer in shock mode, with staggering numbers that speak to a serious slide lower in macroeconomic activity. That scenario, which we were dealing with in the fourth quarter of 2008, is behind us. Now we're looking at numbers that speak to recession without the prospect of inflation."
Consumer energy bills have plunged 23 per cent since March 2008, according to yesterday's figures. Transportation costs – including petrol prices and the cost of new and used cars – were down 13 per cent. Most other bills are rising on a year-over-year basis, however, with health care, education and food among the most robust.
There were declines in the prices of food and clothing in March, compared with the previous month, however, and members of the Obama administration continue to be concerned about the risks of a wider deflationary spiral. Larry Summers, the president's chief economic adviser, said last week that deflation remained a possibility.
Analysts were combing through the Federal Reserve's "Beige Book" last night for more information on the outlook for the US economy, which has now been in recession for 16 months. The book is a collection of surveys by the central bank's regional offices.
It showed that the economy continued to weaken in March and early April, but the speed of contraction was fading and there were scattered signs the recession may be nearing an end. "Five of the 12 districts noted a moderation in the pace of decline, and several saw signs that activity in some sectors was stabilising at a low level," the Fed said.
As a result of this economic slack, districts reported downward pressure on prices, including significant discounting among retailers and many service providers cutting fees, it said. The outlook for the labour market continued to be poor, but while the housing market remained depressed overall, there were some signs that conditions may be stabilising.
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