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Lower Energy Prices Result In Unexpected Drop In Consumer Prices

us cpi 051910

Consumer prices unexpectedly showed a modest decrease in the month of April, according to a report released by the Labor Department on Wednesday, with the unexpected drop in prices reflecting a notable decline in energy prices.

The report showed that the consumer price index edged down by 0.1 percent in April following a 0.1 percent increase in March. The modest decrease came as a surprise to economists, who had been expecting another 0.1 percent increase in prices.

A 1.4 percent drop in energy prices contributed to the unexpected decrease, with significant decreases in prices for gasoline and natural gas outweighing increases in the prices for fuel oil and electricity

Excluding the drop in energy prices as well as a 0.2 percent increase in food prices, the core consumer price index came in unchanged for the second consecutive month. Economists had expected core prices to edge up by 0.1 percent.

The lack of growth in core prices came as increases in prices for transportation and medical care were offset by decreases in prices for apparel and commodities.

Compared to the same month a year ago, total consumer prices were up 2.2 percent in April compared to the 2.3 percent annual rate of growth seen in March. Core prices were up 0.9 percent year-over-year, a deceleration from the 1.1 percent growth seen in the previous month.

With the deceleration in the annual rate of core consumer price growth, James Knightley, an economist at ING Financial Markets, said that the growth rate fell to its lowest levels since January 1966.

"Given the scale of fiscal consolidation ahead, the weak credit environment, relatively high productivity and high unemployment, the risk is that this inflation measure falls even further and we could head towards deflation territory," Knightley said.

He added, "Core CPI is below the levels of late 2003/early 04 when the Federal Reserve (and Ben Bernanke in particular) were worrying about the deflation risk, yet they currently characterize inflation as just being 'subdued.'"

The Labor Department released a separate report on Tuesday showing an unexpected decrease in producer prices in the month of April, with the modest decrease also reflecting a drop in energy prices.

The producer price index edged down by 0.1 percent in April following an unrevised 0.7 percent increase in March. Economists had been expecting producer prices to increase by about 0.1 percent.

Meanwhile, the core producer price index, which excludes food and energy prices, rose by 0.2 percent in April after edging up by 0.1 percent in each of the two previous months. The increase exceeded economist estimates for another 0.1 percent increase.

On an annual basis, total producer prices increased by 5.5 percent in April, a deceleration from the 6.0 percent annual rate of growth seen in March. Core prices were up 1.0 percent compared to the same month a year ago, a modest acceleration from the 0.9 percent increase reported for the previous month.

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