Pakalert Press » Deflation returns; US economy goes back to 1955

Deflation returns; US economy goes back to 1955

Posted by pakalert on April 18, 2009, filed in: World Financial Crisis

As a slump in demand pushes energy and food costs lower, the US economy further deflates for the first time in more than half a century.

‘The notion that inflation will pick up in the near-term is completely out of the picture,’ said one analyst

cture,’ said one analyst

Julia Kollewe | guardian.co.uk,

The US economy has begun to deflate for the first time in more than half a century as a slump in demand pushes energy and food costs lower.

The consumer price index fell at an annual rate of 0.4% in March, the first decline since August 1955, figures from the US labour department showed today. It was bigger than the 0.1% drop expected by economists.

Compared with the previous month, consumer prices dipped by 0.1%.

The decline was mainly caused by lower energy costs, which offset a surge in tobacco prices, the biggest since 1998. If energy and food costs are excluded, the annual inflation rate stands at 1.8%.

Energy costs fell by 3% on the month and gasoline prices were down 4%. Food and housing costs both edged down by 0.1%.

“It reinforces the deflationary fears that the Fed has been voicing,” said George Davis, currency strategist at RBC Capital Markets.

A 2.4% fall in hotel room rates and a 0.2% decline in clothing prices reflected the weakness of consumer demand. But David Buik at BGC Partners pointed out that with “oil prices now stable at close to $50 a barrel, there is no near-term prospect of a further substantial decline in energy prices”. He does not think that the latest figures signal the beginnings of widespread deflation this year.

Certainly, inflation is no longer an issue.

“The notion that inflation will pick up in the near-term is completely out of the picture,” said Peter Kenny at Knight Equity Markets in New Jersey. “Now we’re looking at numbers that speak to recession without the prospect of inflation.”

The figures came as the head of Wal-Mart said that he still saw a “lot of stress” in the economy and did not anticipate a quick end to the recession. “It’s not a ‘V’ recession, where we’re just going to bounce out and come back,” Mike Duke said on NBC’s Today Show.

His comments contrasted with those of Barack Obama and Ben Bernanke, the head of the US central bank, who made a concerted effort yesterday to talk up the prospects for the American economy despite fresh evidence of the squeeze on consumer spending. US retail sales unexpectedly fell last month.

“With the unemployment rate and the output gap both headed for 10% and the financial system still crippled, the risk of a pernicious debt-deflation emerging [where the collateral on loans decreases damagingly in value] is still much bigger than the risk that the Fed’s quantitative easing actions will lead to runaway inflation,” said Paul Ashworth, senior US economist at Capital Economics.

Britain is also on the brink of deflation. Inflation as measured by the retail price index, which is used as a basis for wage negotiations, was zero last month but failed to turn negative as the City had predicted.

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