Lowest inflation since 1955 in April

Prices at the gas pump may be inching up now, but they fell in April, and that helped keep inflation flat for the month, the U.S. Labor Department announced Friday.

Meanwhile, the core rate for the Consumer Price Index, which excludes the often volatile food and energy component, rose 0.3 percent. Economists surveyed by Bloomberg News had expected April consumer prices to remain flat and the core rate to rise 0.1 percent. Consumer prices decreased 0.1 percent in March.

That means, despite large monetary and fiscal stimulus added to the system to combat the financial crisis and recession, inflation is still nowhere in sight. In fact, prices have fallen 0.7 percent in the past 12 months -- the largest decline in 54 years, the Labor Department said. And the core rate is up just 1.9 percent in the past year.

Also, wage pressure remains non-existent: real weekly earnings rose 0.1 percent in April and have risen just 2.6 percent since April 2008.

Low demand, low prices

Russell Price, a senior economist for American Advisor Services in Detroit, acknowledged that U.S. inflation is very low, but he's not a "100 percent inflation dove" at this juncture.

"Demand simply remains too weak for most businesses to find any success in pushing through price hikes at this point," Price told Bloomberg News Friday. "Widespread price cuts, however, are also unlikely, especially given the recent evidence that the economy may be stabilizing."

In April, outside of tobacco prices, which surged 9.3 percent, most prices registered just slight rises or mild declines. Food prices declined 0.2 percent, gasoline prices declined 2.8 percent, apparel dipped 0.2 percent, recreation prices fell 0.4 percent and shelter costs and rents decreased 0.2 percent. Education and communications prices rose 0.3 percent.

Investors should pay attention to CPI data because it's the United States' most comprehensive and accurate measure of retail-level prices and costs. (The Producer Price Index measures wholesale prices and costs.) The U.S. Federal Reserve's dual goal is to maintain price stability while attaining full employment. If inflation reaches an unacceptable level -- historically, above 3 percent is where it becomes a factor in business decisions -- the Fed will increase short-term interest rates to decrease demand and take pressure off prices and wages.

Economic Analysis: Back to your nests, inflation hawks. Inflation is a non-issue, at least at this juncture of the Fed's and Congress' effort to re-liquefy credit markets and jump-start the U.S. economy. The U.S.'s pronounced recession has created intense price pressure on businesses. Firms' pricing power is so weak, in fact, that the U.S. Federal Reserve believes the nation is more likely to experience a bout of deflation at least through mid-2010, and perhaps longer. Moreover, the April CPI data will only reinforce the argument forwarded by the Fed's inflation doves that the nation can maintain an accommodationist monetary policy thru Q4 2009 or Q1 2010 to stimulate the U.S. economy and ensure the quicker arrival of a recovery.

The inflation hawks will squawk and complain, but, as noted, they don't have a lot of evidence these days to support their argument.
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