US Consumer Prices Record Largest Drop In Five Years

US consumer prices fell by the most in more than five years in March and further decreases are likely as the novel coronavirus outbreak suppresses demand for some goods and services, offsetting price increases related to shortages resulting from disruptions to the supply chain.

With the country virtually at a stand-still and the economy rapidly contracting as state and local governments adopt stiff measures to control the spread of COVID-19, the respiratory illness caused by the coronavirus, economists are predicting a period of disinflation or even outright deflation.

"The big concern right now is deflation," said Gus Faucher, chief economist at PNC Financial in Pittsburgh. "Deflation is likely to take hold over the next few months as businesses slash prices in response to much lower demand from the coronavirus outbreak and associated restrictions on movement."

The Labour Department said on Friday its consumer price index dropped 0.4 per cent last month amid a tumble in the costs of gasoline, hotel accommodation, apparel and airline tickets. That was the biggest drop since January 2015 and followed a 0.1 per cent gain in February. In the 12 months through March, the CPI rose 1.5 per cent after increasing 2.3 per cent in February.

Economists polled by Reuters had forecast the CPI dropping 0.3 per cent in March and climbing 1.6 per cent year-on-year.

The general price level decline is expected even as the Federal Reserve has adopted extraordinary measures to stop the economy's free-fall. President Donald Trump last month signed a historic $2.3 trillion package to aid businesses and workers.

"The disinflationary impulse, along with the great disruption in economic and financial market activity, is a key reason why the Fed is unleashing vast new monetary policy stimulus," said Gregory Daco, chief U.S. economist at Oxford Economics in New York.

Restaurants, bars and other social venues have been shuttered. Clothing retailers have also closed shop as have some manufacturers, while transportation has been drastically scaled back, leaving millions of Americans unemployed.

Fears of a sharp global recession and an oil price war between Saudi Arabia and Russia have led to a collapse in crude prices. This is expected to offset price increases caused by bottlenecks in the supply chain.

The widespread business closures impacted March's CPI report, with data collection by personal visit suspended on March 16, the Labor Department said. It said data collection last month was also impacted "by the temporary closing or limited operations of certain types of establishments," leading to "an increase in the number of prices being considered temporarily unavailable and imputed."

That resulted in many indexes being based on smaller amounts of collected prices than usual, and a small number of indexes that are normally published were not published in March.

The dollar was little changed against a basket of currencies. Wall Street and the U.S. Treasury market are closed for Good Friday.

Subdued Underlying Inflation

Excluding the volatile food and energy components, the CPI dipped 0.1 per cent in March, the first drop since January 2010. The so-called core CPI had increased 0.2 per cent for two straight months. Underlying inflation fell in March also as prices for new motor vehicles declined. In the 12 months through March, the core CPI rose 2.1 per cent after increasing 2.4 per cent in February.

The Fed tracks the core personal consumption expenditures (PCE) price index for its 2 per cent inflation target.

The core PCE price index increased 1.8 per cent on a year-on-year basis in February after rising 1.7 per cent in January. It undershot its target in 2019. With some components in the producer price index report that feed into the core PCE price index weakening in March, economists expect inflation pulled back last month.

March's core PCE price index data will be released at the end of the month. The closure of businesses could, however, impact the collection of inflation data in the coming months, making the reports unreliable.

In March, gasoline prices plunged 10.5 per cent, the most since February 2016, after dropping 3.4 per cent in February. Food prices rose 0.3 per cent last month after surging 0.4 per cent in February. Prices for food consumed at home increased 0.5 per cent, matching February's gain.

Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3 per cent. That followed a 0.2 per cent gain in February. The cost of hotel and motel accommodation tumbled a record 7.7 per cent last month. Airline fares dropped 12.6 per cent last month, the biggest decline on record.

Healthcare costs rose 0.4 per cent after edging up 0.1 per cent in February.

Apparel prices dropped a record 2.0 per cent last month after increasing 0.4 per cent in February. New vehicle prices fell 0.4 per cent, the largest drop since April 2018. But prices for used motor vehicles and trucks rose 0.8 per cent after rebounding 0.4 per cent in February.