The slow recovery of the U.S. pricing environment is being displaced by a return of deflationary fears, as the European debt crisis spreads its tentacles into a fragile segment of the U.S. economy.
Economists expect the U.S. consumer price index figures for April, due out Wednesday, to show little or no growth in prices – consensus estimates call for a 0.1-per-cent monthly rise in seasonally adjusted inflation in the month, matching a thin increase in March. But some experts believe a stagnant U.S. housing market, coupled with gains in the U.S. dollar fuelled by a flight away from euro-denominated assets, may have pushed the April CPI change into the red – which would mark the first monthly decline in more than a year.
Further, the year-over-year measure of core CPI growth (which excludes the volatile food and energy components, and is considered a key measure of underlying price pressures in the broader economy) is in danger of slipping below 1 per cent – for the first time since 1966.
What’s more, the snowballing crisis in Europe has added further downward pressure to U.S. prices since April ended. The exodus from the euro, and flight to the perceived safety of the U.S. dollar, have fuelled a 5-per-cent rise in the greenback against the world’s major currencies – a move sure to drive down U.S. prices for imported goods and put more downward pressure on an already weak pricing environment.
“One thing is certain – we don’t really need any help down on inflation,” said Eric Green, chief U.S. rates strategist at TD Securities in New York.
While the U.S. economy has been slowly digging itself out of the pricing rut caused by the recession and credit crunch, it continues to be held back by a continued overcapacity in several key sectors – most notably the housing market, where prices remain depressed. Now, factors beyond the U.S. borders have started to line up to add new downward pressures to prices.
Several of Europe’s more troubled economies have already slipped into deflation, and the casualty list may grow as European governments tighten their spending belts to rein in debt – slowing economic demand both within and outside their borders. Meanwhile, growing signs of a slowdown in China is already putting downward pressure on commodity prices.
“The last time this happened, it wasn’t very constructive,” said Gluskin Sheff + Associates chief economist David Rosenberg.
Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., said the threat of deflation has continued to hang over the U.S. economy even as it has recovered from the recession – chiefly because credit conditions and labour markets have remained stagnant.
“Whenever money supplies and wages are falling, deflation is a risk. This applies to all countries, because money and credit are falling or nearly falling everywhere,” he said.
Mr. Green noted that while “low inflation and strong growth is great for risk assets” – such as stock markets – the picture is much less pleasant if that slips into slowing growth and deflation. Economists also fear that would put a whole new set of pressures on a U.S. economy already saddled with enormous government debt levels.
“Ultimately, the U.S. needs to grow its way out of debt and inflate its way out of debt,” Mr. Green said.
