Consumer prices in the United States fell for the second consecutive month in April, the Bureau of Labor Statistics reported on Tuesday. Prices fell 0.8% on a seasonally adjusted basis in April, marking the largest drop since December 2008.
Falling prices may seem like a good thing, but economists agree that deflation – the opposite of inflation – would be very bad news.
When prices go down because people don’t buy, manufacturers sometimes can’t charge enough to make the product they’re trying to sell. This means that they will stop making these products and lay off workers. This can trigger a vicious circle in which demand continues to fall as more and more people lose their jobs.
Deflation is not there yet – prices have risen 0.3% in the past 12 months. But if home orders continue to plunge the economy into a massive slowdown, falling prices could exacerbate the damage.
The astonishing decline of oil
The oil market is experiencing diminishing demand as people cancel their travel plans, work from home, or lose their jobs. Still, oil companies continued to produce, while limited storage capacity for barrels of oil pushed the price of an oil futures contract into negative territory last month.
Prices for clothing, cars and airline tickets are also falling
While falling energy prices made up the majority of the price declines last month, it was not the only area where prices fell.
Prices for clothing, auto insurance, air fares and accommodation away from home have contributed to the decline in the overall index as demand for these goods and services disappears.
As most of America continues to be subject to some degree of foreclosure restrictions, the amount of vacation spending and many discretionary items has decreased. Economists fear that this type of spending will take time to recover, with consumers remaining cautious even after the restrictions are lifted.
Food and Rent Prices Soar
Meanwhile, food prices rose, with the home food category recording its largest increase since February 1974, up 2.6%.
Rents and medical expenses also increased 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 at around 2% – widely accepted as the ideal balance for the U.S. economy.
“Even as the economy reopens, core inflation is expected to be below 1% in the coming year in the face of high unemployment and low commodity prices,” said economist Sal Guatieri principal at BMO.
Typically, such monetary action should increase inflation. But Oxford Economics chief economist Gregory Daco said that given the direction of prices, “a surge in inflation is the least of our worries.”