Consumer inflation vanishes, a boon for borrowers
AP Economics Writers
WASHINGTON – Inflation has essentially disappeared, and that gives the Federal Reserve more room to keep interest rates at record lows.
Consumer prices fell in April for the first time in more than a year. The figures released Wednesday were welcome news for people who qualify for loans and want to take on more debt. But low rates hurt savers, especially those on fixed incomes.
The Fed now appears more likely to keep rates at record-low levels well into next year, economists say. Some had thought it would start increasing rates at the end of this year.
Paul Ashworth, senior U.S. economist at Capital Economics, said he thinks the Fed won’t start raising rates until late next year – and possibly not until 2012.
Declining gas prices pulled overall prices down 0.1 percent last month. Gas prices are predicted to sink lower still this summer.
Core inflation, which excludes volatile food and energy prices, was flat in April. Over the past 12 months, it has risen just 0.9 percent – the smallest increase in 44 years.
The weakness of the economy has kept inflation so low that some economists are beginning to worry about the possibility of deflation – a destabilizing period of falling prices and wages.
Normally, if interest rates are kept too low for too long, it raises fears of inflation. But not now, with inflation having disappeared. Those low rates could provide some protection to the U.S. economy if the European debt crisis were to spread globally.
The Fed’s record-low rates influence rates charged to consumers. The prime lending rate used by major banks to set rates on some credit cards and consumer loans will remain at about 3.25 percent. That’s its lowest point in decades.
Economists had expected overall prices and core prices to edge up 0.1 percent in April. The drop in overall prices was the first decline since a similar dip in March 2009.
Energy prices fell 1.4 percent, the biggest one-month decline since March 2009. Gasoline prices dropped 2.4 percent. Analysts expect further declines in coming months because crude oil prices have fallen nearly 20 percent since April.
Food costs rose 0.2 percent in April, the same modest increase posted in March. Economists had expected a bigger increase because of a winter freeze on Florida vegetable and citrus crops.
Clothing costs dropped 0.7 percent. The cost of new vehicles was unchanged. Airline tickets rose 2.2 percent, one of the few areas to show price pressures last month.
The sluggish economy has made most businesses reluctant to raise prices, said Joel Naroff, president of Naroff Economic Advisors.
Even though inflation is largely absent, workers have not been able to benefit much. Their paychecks have been shrinking because the weak job market has left workers with little bargaining power. Average hourly earnings, adjusted for inflation, dropped 0.6 percent for the 12 months ending in April.
Inflation at such low levels raises concerns of deflation, which would lead many consumers to delay purchases in the expectation that prices would drop further.
But most economists say they still think the deflation threat remains remote. The overall economy has begun growing again and hiring is starting to pick up. The United States has not had to battle deflation since the 1930s.
For now, the biggest losers are savers. The average yield on a one-year certificate of deposit has sunk to 0.7 percent, according to Bankrate.com. That’s the lowest it’s been since Bankrate starting tracking the figure in 1983.