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.
Falling prices may sound like a good thing, but economists agree that deflation – the opposite of inflation – would be very bad news.
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
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.
Clothes, cars and airfares also fall
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
Meanwhile, food prices rose higher, and the food category had the largest increase since February 1974, rising by 2.6%.
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.
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."