Archive for Saturday, May 17, 2003

Prices decline in April

Stores face lackluster sales

May 17, 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 Friday.

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 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 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 on Friday said 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," 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.

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