Consumer Prices Dip Unexpectedly In March
WASHINGTON — So much for fears that flooding the economy with money to fight the financial crisis would ignite inflation. The recession is keeping a tight lid on both prices and wages.
Consumer prices have fallen over the past year at the fastest clip in more than a half-century, including an unexpected drop in March. Economists see little sign that inflation will be a problem anytime soon.
Adding to evidence of the economy's weakness, the Federal Reserve said Wednesday that production at the nation's factories, mines and utilities fell in March for the fifth month in a row, and faster than analysts predicted.
There was some good news: A series of Fed snapshots from around the country found a few faint signs that the steep plunge in economic activity that began last fall is beginning to level off.
For example, the report said that while home prices and construction are still declining in most of the country, the number of people shopping for homes has begun to rise, leading to a scattered pickup in some places.
Wall Street, which in recent weeks has rallied on hopes the recession might be easing its stranglehold, rallied in the final hour of trading. The Dow Jones industrial average finished 109 points higher at 8,029.
Consumer prices dropped 0.1 percent for March, the Labor Department said. Over the past 12 months, consumer prices have dropped 0.4 percent _ the first 12-month decline since 1955.
Economists seem to think the United States has entered a period of sustained low inflation. The trillions of dollars committed by the government to stop the financial crisis will probably prevent broad price declines, economists say.
Some economists said prices may keep declining slightly this year _ though not enough to trigger a dangerous bout of deflation.
"The risk of deflation has been put at bay," said Sal Guatieri, an economist at BMO Capital Markets. "We don't expect a widespread, sustained drop in prices over the next couple of years."
Economists worry about any widespread and prolonged decline in prices. Deflation drags down wages, clobbers home prices and leads people and businesses to hold off on buying things so they can wait for lower prices.
Analysts say further low inflation will keep rates low on mortgages and other loans. Low inflation also could allow businesses to keep pay raises to a minimum, even after the economy begins to recover.
John Ryding, chief economist at RDQ Economics, said in a note to clients that the overall drop in prices for the past year is "not evidence of general deflation pressures but a product of the bursting of the speculative bubble in energy prices." Crude oil sold for $147 a barrel last summer and trades for about $50 now.
In March, the price of gas, home heating oil and natural gas all fell slightly in March. Food costs dropped by a minuscule 0.1 percent. The declines offset the biggest rise in tobacco prices in more than a decade.
Travel got cheaper _ air fares and lodging both fell by a little more than 2 percent _ but medical care, education and clothing all became slightly more expensive.
The core inflation figure, which doesn't account for energy and food prices, rose 0.2 percent, the same as it has over the past three months. Core inflation is up 1.8 percent for the past year.
The recession has matched the longest in the post-World War II period. Wages and consumer spending are down, and companies have been forced to keep prices down, too.
Some economists have expressed concern that the Federal Reserve's interest rate cuts and other efforts to stimulate growth are setting the stage for severe inflation once the economy recovers.
In addition to cutting its benchmark short-term interest rate to nearly zero, the Fed has vastly expanded its lending to financial institutions, by more than $1 trillion since the financial crisis intensified last fall.
But Dean Maki, an economist at Barclays Capital, said any serious inflation risks are at least two to three years away.
The weak new figures on industrial production point to one reason why. Over the past three months, industrial production has plunged at an annual rate of 20 percent _ the biggest quarterly decline in more than three decades.
The nation's factories, mines and utilities operated at just 69 percent of capacity last month, the lowest rate on records that go back to 1967.
"This is a measure of how bad the recession is, but we think this may be the worst quarter for industrial production," said Nariman Behravesh, chief economist at IHS Global Insight.
The plunge in factory output in recent months had been triggered by the slump in consumer spending. Behravesh said if consumer spending starts to rebound, as some signs have indicated, then production should stabilize in coming months.
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CHRISTOPHER S. RUGABER and MARTIN CRUTSINGER | April 15, 2009 06:25 PM EST |
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