WASHINGTON – Consumer prices fell by 0.3 percent in April, the biggest decline in 18 months, led by a retreat in energy prices as the Iraq war wound down. Prices for cars, clothes and food also went down.
While Friday's report from the Labor Department (search) made clear that inflation isn't a problem for the struggling economic recovery, it could raise more concerns over whether the United States is heading down a path of a destabilizing fall in prices.
April's decline in the Consumer Price Index (search), the government's most closely watched inflation gauge, came after prices rose by 0.3 percent in March.
The drop in April's prices was the biggest since October 2001 and was deeper than the 0.1 percent dip economists were forecasting.
Federal Reserve (search) Chairman Alan Greenspan and his colleagues are on guard for any signs of deflation -- prolonged and widespread decline in prices -- in the U.S. economy. Though they say the chances of deflation cropping up are remote, Fed policy-makers last week signaled that they were prepared to lower short-term interest rates to ward off even the threat of that happening.
Private economists said the Fed's concerns 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.
Much of the weakness of consumer prices in April stemmed from a 4.6 percent drop in energy prices as the war in Iraq came to an end. In March, energy prices, stoked by war tensions, rose by 4.6 percent.
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. Food prices in March rose 0.2 percent.
Excluding energy and food prices, which can swing widely from month to month, the "core" rate of inflation was flat in April for the second straight month.
Prices for cars dropped by 0.4 percent in April, reflecting heavy generous incentives to discounts to move cars off lots amid lackluster consumer demand. Clothing prices went down 0.6 percent in April as merchants discounted merchandise to attract shoppers.
While deflation is dangerous, more normal and contained cases of falling prices can benefit consumers. High energy prices had put a damper on consumer spending, the main force keeping the economy going. Lower energy prices will put less of a strain on wallets and pocketbooks and may make consumers feel more inclined to buy, economists said.
That's important because consumer spending accounts for two-thirds of all economic activity in the United States. Consumers have been spending sufficiently so far to keep the economy afloat and out of another recession. But businesses, faced with weak profits and unsure about the recovery, 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.