U.S. consumer prices plunge

U.S. consumer prices edged up in May on higher gasoline prices, but fell over the past 12 months by the most since 1950, in a sign that inflation was no threat for now as the country fights a brutal recession.

The Labor Department said on Wednesday its Consumer Price Index edged up 0.1 per cent month on month, after being flat in April, below market expectations for a 0.3-per-cent increase.

Compared to the same period last year, however, consumer prices fell 1.3 per cent, the largest decline since April 1950.

Concerns have grown in recent weeks that inflation could resurface this year, given massive efforts by the U.S. government and the Federal Reserve to pull the economy out of the longest recession since the Great Depression of the 1930s.

"These numbers today and yesterday clearly show that at least for now the immediate concerns over inflation are not justified," said Marc Pado, market strategist at Cantor Fitzgerald & Co in San Francisco.

U.S. stock index futures were barely higher, while Treasury debt prices trimmed losses on the data.

A separate report from the Commerce Department showed the U.S. current account deficit shrank in the first quarter to $101.5-billion (U.S.), the lowest since the fourth quarter of 2001.

The CPI data showed that core prices, excluding food and energy, also rose only 0.1 per cent, slower than April's 0.3 per cent monthly increase, as prices for tobacco and smoking products fell after surging the last two months on the back of a federal excise tax increase.

Smallest advance in core prices

The rise in the monthly core CPI was the smallest advance since December 2008. The increase came as new vehicle prices rose for a fifth straight month. Shelter and medical costs also contributed to the gain in the core index.

Core prices increased 1.8 per cent year-over-year after a 1.9 per cent 12-month rise in April.

Gasoline prices rose 3.1 per cent from April versus a 2.8 per cent drop a month earlier.

The food index fell 0.2 per cent in the month, declining by the same margin for two straight months.

Data released on Tuesday showed producer inflation was muted in May, despite higher gasoline prices. Compared to the same period last year, prices paid at the farm and factory gate experienced their steepest fall since 1949.

Investors have been pricing in rising inflation risks in the bond market. Benchmark Treasury debt yields spiked to an eight-month high last week. The yield difference between Treasury Inflation-Protected Securities and Treasuries has grown since the beginning of the year.

But analysts reckon the bond market is getting ahead of itself and argue the economy is more at risk of deflation than inflation, citing excessive slack in productive capacity and huge stocks of unsold goods.

According to Fed data on Tuesday, U.S. capacity utilization dropped to a record low 68.3 per cent in May.

"The worries that everyone has about inflation, it's something that may occur, and it's certainly not an imminent threat to the economy," said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.

"Clearly the Fed sees it that way as well and we expect when the Fed does speak, they will reinforce the fact that inflation is not an issue."

The first-quarter current account deficit equalled 2.9 per cent of U.S. gross domestic product, a sharp drop from 4.4 per cent in the fourth quarter and the lowest since 2.8 per cent in the first quarter of 1999, a Commerce Department official said.

The current account is the broadest measure of total U.S. trade with the rest of the world, covering goods, services and income transfers.

U.S. exports and imports both fell in the first quarter as severe world recession hit consumer demand and crimped trade.

Exports dropped to $509.6-billion, from $591.7-billion in the previous three months, while imports shrank more steeply, to $581.5-billion from $715.1-billion.