Prices are tumbling at an alarming rate


US consumer prices fell for the second straight month in April, the Bureau of Labor Statistics reported Tuesday. Prices fell by 0.8% on a seasonally adjusted basis in April, marking the biggest fall since December 2008.

It is an alarming fall, first and foremost falling gasoline and energy prices. But excluding volatile food and energy, prices still fell by 0.4%. It is the largest monthly decline in the so-called core price index since BLS began tracking the data in 1957.

Falling prices may sound like a good thing, but economists agree that deflation – the opposite of inflation – would be very bad news.

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When prices fall because people don't buy things, manufacturers sometimes can't charge enough to make the product they're trying to sell. That means they stop making these products and lay off workers. It could start a vicious cycle where demand continues to fall as more people lose their jobs.

Deflation is not here yet – prices have risen 0.3% in the last 12 months. But if home-from-home continues to plunge the economy into a massive downturn, lower prices could aggravate the damage.

The oil's fantastic decline

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The collapse in gasoline prices was brought on by a demand crisis in the oil market, combined with an unforeseen time for a major price war between Saudi Arabia and Russia.

The oil market is struggling with declining demand as people resign their travel plans, work from home or lose their jobs. Still, the oil companies continued to produce, while limited oil storage capacity pulled the price of an oil futures contract into negative territory last month.

Americans knew the effect of the pump, as BLS's gasoline price index fell by 20.6% in April. The overall energy index fell 10.1%.

Clothes, cars and airfares also fall

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Although tumbling energy prices accounted for the majority of falling prices last month, it was not the only area where prices fell.

The prices of clothing, car insurance, flight prices and lodging from home helped to pull the overall index down as demand for these goods and services disappeared.

Since most of America is still subject to a certain amount of containment restrictions, the amount of vacation expenses and many discretionary items has gone down. Economists worry this kind of expense may take time to recover as consumers are cautious even after the restrictions are lifted.

The prices of food and rent hover

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Meanwhile, food prices rose higher, and the food category had the largest increase since February 1974, rising by 2.6%.

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The egg price index climbed more than 16% – the biggest increase for some foods.

Rental and medical costs also increased.

Economists expected that the coronavirus crisis would have a largely deflationary effect. The April data is proof of that. That's bad news for policy makers in the Federal Reserve, who like to keep inflation at around 2% – widely accepted as the ideal balance for the US economy.

"Even as the economy reopens, core inflation is likely to fall below 1% in the coming year in the face of high unemployment and low commodity prices," said Sal Guatieri, senior economist at BMO.

Bold unleashed a huge monetary policy stimulus package to stabilize the markets and help the economy through this crisis.

Generally, monetary measures such as it are expected to increase inflation. But Oxford Economics chief US economist Gregory Daco said given the direction prices are going, "an increase in inflation is the least of our worries."

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