U.S. consumer prices fell for a third straight month in May and underlying inflation was weak as demand for goods and services remained subdued amid a recession caused by the COVID-19 pandemic.
But with non-essential businesses reopening after shuttering in mid-March to slow the spread of COVID-19, deflation, a decline in the general price level, is unlikely. Still, the report from the Labour Department on Wednesday suggested the disinflationary trend could persist for a while.
That together with a struggling labour market could see the Federal Reserve maintaining its very accommodative monetary policy stance for some time while nursing the economy back to health. Officials from the U.S. central bank were wrapping up a two-day policy meeting on Wednesday.
“We expect the crisis to result in a sustained slowing in inflation due to a net increase in slack,” said Jim O’Sullivan, chief U.S. macro strategist at TD Securities in New York. “The trend in inflation was already too low from the perspective of Fed officials. The latest data help the case for Fed officials to send a dovish signal today.”
The Labour Department said its consumer price index dipped 0.1 per cent last month after plunging 0.8 per cent in April, which was the largest decline since December, 2008. Prices were held down by a 3.5-per-cent drop in the cost of gasoline, which came after a 20.6-per-cent plunge in April. That offset a 0.7-per-cent increase in the cost of food last month. Food prices jumped 1.5 per cent in April.
Prices for food consumed at home rose 1.0 per cent after surging 2.6 per cent in April. The cost of beef shot up a record 10.8 per cent in May, reflecting shortages, a result of COVID-19 infections at meat processing plants. Consumers also paid more for dairy products, fruits and vegetables. But cereals and bakery products were cheaper last month.
In the 12 months through May, the CPI edged up 0.1 per cent. That was the smallest year-on-year rise since September, 2015, and followed a 0.3 per cent increase in April.
Economists polled by Reuters had forecast the CPI would be unchanged in May and gain 0.2 per cent year-on-year.
The National Bureau of Economic Research, the arbiter of U.S. recessions, declared on Monday that the economy slipped into recession in February.
The Labour Department said in-store data collection had remained suspended since March 16 because of risks of exposure to COVID-19. The department added that data collection last month was also affected “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.”
Stocks on Wall Street were mixed as investor attention shifted to the Fed’s first projections on the economy post-coronavirus outbreak. The dollar fell against a basket of currencies. U.S. Treasury prices rose.
Excluding the volatile food and energy components, the CPI slipped 0.1 per cent in May after decreasing 0.4 per cent in April, the largest drop since the series started in 1957. The so-called core CPI fell in March for the first time since January, 2010.
May marked the first time that the core CPI has dropped for three consecutive months. Underlying inflation was depressed by continued decreases in the costs of motor-vehicle insurance and apparel. Airline fares fell 4.9 per cent and used cars and trucks prices dropped 0.4 per cent.
The cost of hotel and motel accommodation dropped 1.8 per cent last month after record 8.1 per cent plunge in April.
Those price declines offset a 0.3-per-cent increase in owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home. This rent measure gained 0.2 per cent in April, likely reflecting forbearance agreements between landlords and tenants who have lost their jobs or have had their hours cut because of the global pandemic.
The economy has shed nearly 20 million jobs since March.
Health-care costs increased 0.5 per cent in May after a solid 0.4 per cent rise in April. Consumers paid more for household furnishings, new vehicles, alcoholic beverages and education.
In the 12 months through May, the core CPI rose 1.2 per cent, the smallest gain since March, 2011. The core CPI increased 1.4 per cent year-on-year in April.
The Fed tracks the core personal consumption expenditures (PCE) price index for its 2 per cent inflation target. The core PCE price index increased 1.0 per cent on a year-on-year basis in April, the smallest advance since December, 2010. May’s core PCE price index data will be released at the end of the month.
“The weakness in the economy should keep downward pressure on inflation over time and we expect softness in the core measures to be reported for upcoming months,” said Daniel Silver, an economist at JPMorgan in New York. “But we think that we probably have moved past the largest sequential monthly declines in inflation that came shortly after the virus spread.”
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