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The Honolulu Advertiser

Posted on: Saturday, May 17, 2003

Consumer prices fell in April

By Jeannine Aversa
Associated Press

WASHINGTON — Lower prices for energy, cars and clothes drove consumer costs down in April by the largest amount in 18 months, underscoring Federal Reserve anxiety about the possibility of a destabilizing decline.

The Consumer Price Index, the government's most closely watched inflation gauge, declined by 0.3 percent last month, after rising by 0.3 percent in March, the Labor Department reported yesterday.

For the 12 months ending with April, consumer prices were up a modest 2.2 percent. The performance of "core" prices, which exclude volatile energy and food costs, is even lower, a gain of just 1.5 percent during the same period, the smallest increase since 1966.

"Pricing power is receding right across the board," said David Rosenberg, Merrill Lynch's chief economist.

Faced with lackluster customer demand, businesses are keeping a lid on price increases and in some cases are cutting prices to lure shoppers.

Federal Reserve chairman Alan Greenspan and his colleagues are on guard for any signs of deflation, a prolonged and widespread decline in prices, in the economy. Though they say the chances of deflation are remote, Fed policy-makers last week signaled that they were prepared to lower short-term interest rates to ward off even the threat of that happening.

Private economists said the Fed's worries over deflation raised the odds of a cut in the federal funds rate, now at a 41-year low of 1.25 percent, at the central bank's next meeting June 24-25.

Federal Reserve Vice Chairman Roger Ferguson yesterday said the Fed must be on the lookout for deflation but added that the chance of a serious bout "remains quite remote."

"Quite simply, the United States has too many good things going for it to make a forecast of deflation credible," Ferguson said in a commencement speech at Washington University's business school. He listed the aggressive interest rate cuts the Fed has engineered as well as the boost the economy will receive from declining oil prices as positives that should keep deflation from setting in.

The report of the CPI decline came one day after the government reported wholesale prices fell by a record 1.9 percent in April.

While deflation is dangerous, more normal and contained cases of falling prices can benefit consumers.

High energy prices have put a damper on consumer spending, the main force keeping the economy going.

Economists are hopeful that retreating energy prices will make consumers feel more inclined to buy. That's important because consumer spending accounts for two-thirds of all economic activity in the United States.

In April, as the Iraq war wound down, energy prices fell by 4.6 percent, which reversed an increase of the same size in March. Gasoline prices fell 8.3 percent, fuel oil prices were down 14.9 percent and natural gas prices decreased 3.8 percent. Even with April's decline, energy prices are still up 13 percent over the last 12 months.

A preliminary report showed that the University of Michigan's consumer sentiment index rose to 93.2 in May from a reading of 86 in April.

One bright spot of the economy, the residential construction market, hit a rough spot in April, another report showed.

The number of new housing projects builders began work on in April dropped by 6.8 percent to a seasonally adjusted annual rate of 1.63 million, the Commerce Department said. The decline came after housing starts rose by a solid 6.6 percent in March.