- The Washington Times - Friday, May 16, 2003

Lower prices for energy, cars and clothes drove consumer costs down in April by the largest amount in 18 months, underscoring Federal Reserve anxiety about the possibility of a destabilizing decline.

The Consumer Price Index, the government’s most closely watched inflation gauge, declined by 0.3 percent last month, after rising by 0.3 percent in March, the Labor Department reported yesterday.

For the 12 months ending with April, consumer prices were up a modest 2.2 percent. The performance of “core” prices, which exclude volatile energy and food costs, is even lower, a gain of just 1.5 percent during the same period, the smallest increase since 1966.

“Pricing power is receding right across the board,” said David Rosenberg, Merrill Lynch’s chief economist.

Faced with lackluster customer demand, businesses are keeping a lid on price increases and in some cases are cutting prices to lure shoppers.

Federal Reserve Chairman Alan Greenspan and his colleagues are on guard for any signs of deflation, a prolonged and widespread decline in prices, in the economy. Though they say the chances of deflation are remote, Fed policy-makers last week signaled they were prepared to lower short-term interest rates to ward off even the threat of that happening.

Private economists said the Fed’s worries over deflation raised the odds of a cut in the federal funds rate, now at a 41-year low of 1.25 percent, at the central bank’s next meeting June 24-25.

Federal Reserve Vice Chairman Roger Ferguson said yesterday the Fed must be on the lookout for deflation but added that the chance of a serious bout “remains quite remote.”

“Quite simply, the United States has too many good things going for it to make a forecast of deflation credible,” Mr. Ferguson said in a commencement speech at Washington University’s business school. He listed the aggressive interest rate cuts the Fed has already engineered as well as the boost the economy will receive from declining oil prices as positives that should keep deflation from setting in.

The report of the CPI decline came one day after the government reported wholesale prices fell by a record 1.9 percent in April.

While deflation is dangerous, more normal and contained cases of falling prices can benefit consumers.

High energy prices have put a damper on consumer spending, the main force keeping the economy going.

Economists are hopeful that retreating energy prices will make consumers feel more inclined to buy. It’s important because consumer spending accounts for two-thirds of all economic activity in the United States.

In April, as the Iraq war wound down, energy prices fell by 4.6 percent, which reversed an increase of the same size in March. Gasoline prices fell by 8.3 percent, fuel oil prices were down 14.9 percent and natural gas prices decreased 3.8 percent. Even with April’s decline, energy prices are still up 13 percent over the past 12 months.

A preliminary report showed that the University of Michigan’s consumer sentiment index rose to 93.2 in May from a reading of 86 in April.

While consumers might be feeling better, businesses aren’t. Struggling with mediocre profits and unsure about the recovery, they have been wary of making big commitments in capital spending and hiring. That’s a major force hurting the economy’s ability to get back to full throttle.

One boon to the economy, the residential construction market, hit a rough spot in April, another report showed.

The number of new housing projects begun in April dropped by 6.8 percent to a seasonally adjusted annual rate of 1.63 million, the Commerce Department said. The decline, which some economists said reflected rainy and cool weather in some parts of the country, came after housing starts rose by a solid 6.6 percent in March.

David Seiders, chief economist at the National Association of Home Builders, said that with 30-year mortgage rates at record lows and builders now feeling more upbeat about sales prospects, he expected a rebound in residential construction in May.

In the CPI report, the drop in April’s prices was the biggest since October 2001 and was deeper than the 0.1 percent dip economists were forecasting.

Food prices in April dipped by 0.1 percent, reflecting falling prices for fruits, vegetable and diary products. Prices for poultry, beef and pork went up.

Prices for new cars and trucks dropped 0.4 percent in April, reflecting generous incentives and discounts to move cars off lots amid meager consumer demand. Clothing prices went down 0.6 percent as merchants discounted merchandise to attract shoppers. Computer prices dropped 1.6 percent.

But prices for education, including tuition and books, were up 0.5 percent, and costs for medical care rose 0.2 percent in April, stinging consumers.

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