Consumer prices dip for second straight month, extending break for American pocketbooks
WASHINGTON – WASHINGTON (AP) — Consumer prices fell for the second straight month, extending a break for Americans' pocketbooks. Less expensive energy bills were the main factor pulling down prices.
The Labor Department reported Thursday that the Consumer Price Index, the government's most closely watched inflation barometer, dropped 0.2 percent in May, following a 0.1 percent dip in April.
"The weak recovery has its upside, declining energy costs and that is helping take pressure off the cash-strapped consumer," said Joel Naroff, president of Naroff Economic Advisors.
It marked the biggest decline since consumer prices plunged 0.7 percent in December 2008. That was a period when the worst recession since the 1930s stoked fears of deflation. The country didn't get stuck in a deflationary spiral then, and probably won't now, economists say.
Deflation is dangerous. It's a widespread and prolonged drop not only in the prices of goods at stores but also real estate, stocks and wages. America's last serious case of deflation was during the Great Depression of the 1930s.
Meanwhile, "core" consumer prices, which strip out volatile energy and food, edged up 0.1 percent in May, after being flat in April. That meant core prices are up only 0.9 percent over the past year — below the Fed's inflation target and holding at a 44-year low.
For the year, overall consumer prices rose 2 percent — within the Fed's inflation comfort zone.
Falling energy prices pulled overall prices down last month.
Energy prices dropped 2.9 percent, the most in more than a year. Gasoline prices posted the biggest decline — down 5.2 percent in May, the sharpest decline since December 2008.
Prices at the pump have dropped about 8 percent since hitting $2.93 a gallon on May 6. Global oil prices have been falling amid fears that the European debt crisis will hurt growth on the continent and possibly slow the global recovery.
Food prices were flat in May, down from a 0.2 percent rise in April. Falling prices for fruits and vegetables swamped rising prices for meat, cereals and dairy products.
Even though inflation is tame, workers' paychecks aren't benefiting. Average hourly earnings adjusted for inflation was flat for the 12 months ended May. That followed a 0.5 percent drop in April.
Because inflation isn't a problem for the economy, the Federal Reserve has leeway to keep holding a key interest rate at a record low near zero. Low rates should help nurture the economic recovery and nip deflationary forces. The Fed is all but certain to leave rates at record lows when it meets next on June 22-23. Economists now predict the Fed won't start boosting rates until next year — or possibly 2012.
Surveying Thursday's report, Sal Guatieri, economist at BMO Capital Markets Economics, predicted Fed policymakers will stay "on hold at least until the new year."
Fed Chairman Ben Bernanke says he expects inflation to be under wraps because there is so much "slack" in the economy. Companies are wary of jacking up prices because consumers are spending cautiously. Factories and businesses are still operating well below full throttle. Workers aren't likely to see hefty pay raises any time soon given high unemployment.
Best Buy shoppers, for instance, spent less than expected this spring, contributing to a rocky first quarter for the chain. Best Buy actually sold more TVs, but at lower prices. The average TV was about $150 cheaper in April than a year earlier, according to the NPD Group. Prices, however, are coming down more slowly than before as the market for flat-screen sets matures.
Thursday's price report also showed that new car prices edged up 0.1 percent last month, while clothing prices rose 0.2 percent. Recreation prices were flat.
Prices for education and prescription drugs each increased 0.3 percent — categories that are up sharply over the past year. Prices for airline fares jumped 1.9 percent last month, while prices for tobacco and other smoking products rose 1.3 percent, the most in nearly a year.