(CNN Business) – Prices are falling in the United States as the coronavirus blockade lengthens and people spend less.
US consumer prices fell for the second consecutive month in April, the Bureau of Labor Statistics (BLS) reported Tuesday. Prices fell 0.8% on a seasonally adjusted basis in April, marking the biggest drop since December 2008.
That is an alarming drop, mainly dragged down by the drop in the prices of gasoline and energy. But excluding volatile food and energy prices, which still fell 0.4%. That’s the biggest monthly drop in the so-called basic consumer price index since the BLS started tracking data in 1957.
Falling prices may seem like a good thing, but economists agree that deflation, the opposite of inflation, would be very bad news.
When prices drop because people are not buying things, manufacturers sometimes cannot charge enough to make the product they are trying to sell. That means they will stop making those products and fire the workers. That can start a vicious cycle in which demand continues to drop as more people lose their jobs.
Deflation is not yet underway in the US: Prices have risen 0.3% in the past 12 months. But if confinement orders continue to plunge the economy into a massive recession, lower prices could exacerbate the damage.
The surprising drop in oil
The collapse of gas prices was triggered by a crisis in demand in the oil market, combined with an inopportune time for a major price war between Saudi Arabia and Russia.
The oil market is struggling with declining demand as people cancel their travel plans, work from home, or lose their jobs. However, the oil companies continued to produce, while limited storage capacity for barrels of oil dragged the price of an oil futures contract into negative territory last month.
Americans felt the effect at service stations as the BLS gasoline price index plummeted 20.6% in April. The overall energy index fell 10.1%.
Clothing, car and airfare prices also fell
Even though the drop in energy prices accounted for the majority of falling prices last month, it was not the only area where prices fell.
Clothing prices, auto insurance, air fares, and vacation accommodations helped lower the overall rate as demand for these goods and services disappeared.
As most of the United States continues under some degree of restrictions and blockades, the amount of vacation spending and many discretionary items has been reduced. Economists fear that this type of spending may take time to recover as consumers remain cautious even after restrictions are lifted.
Food and rent prices soar
Meanwhile, food prices rose further, and the household food category recorded its largest increase since February 1974, up 2.6%.
The egg price index rose more than 16%, the largest increase for any food item.
Rents and medical costs also increased slightly.
Economists expected the coronavirus crisis to have a largely deflationary effect. April data is proof of this. That’s bad news for policymakers at the Federal Reserve (Fed) who like to keep inflation around 2%, widely accepted as the ideal balance for the U.S. economy.
“Even when the economy reopens, core inflation is likely to drop below 1% in the coming year due to high unemployment and low commodity prices,” said Sal Guatieri, Senior Economist at BMO.
The Fed has unleashed a huge monetary policy stimulus package to stabilize markets and help the economy overcome this crisis.
Normally, a monetary action like that is expected to increase inflation. But Oxford Economics chief economist Gregory Daco said that given the direction prices are heading, “an increase in inflation is the least of our concerns.”
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