CPI Falling, But Does That Mean Better Prices for Consumers?

The Bureau of Labor Statistics recently released Consumer Price Index (CPI) data for April, showing a decline in prices for a second-straight month. The 0.8 percent drop is the largest since December 2008.

According to the report, a 20.6-decline in gas prices was the most significant contributor to the CPI. The fall in gas prices is a combined result of the ongoing price war between Saudi Arabia and Russia and decreased fuel demand related to the pandemic.

Apparel, motor vehicle insurance, airline fares, and lodging away from home each saw significant drops as well. With several large retailers recently filing for bankruptcy, airlines reducing routes, and insurance companies refunding customers, it’s easy to see how the prices for these goods and services have fallen.

But prices for several essential goods rose.

Food, and more specifically, “the food at home index,” jumped from a 0.5 percent increase in March to a 2.6 percent increase in April. Meats and egg prices rose 4.3 percent and 16.1 percent, respectively, due to supply chain shortages in meat processing facilities.

Rent also rose about 0.2 percent after a 0.3 percent increase in March, but the report notes that the drop in the lodging away from home index offset those increases.

And although consumers can cut apparel expenditures and lodging away from home with little issue, it’s concerning that necessity goods continue to see rising prices when consumers have less money to spend overall.

While low prices for most other goods sound great for consumers, the rapid decline has raised concerns about deflation, prompting the Federal Reserve to pump money into the economy to curb the threat.

“The Federal Reserve should be more worried about deflation, when prices are falling broadly in the economy, rather than inflation, when prices are rising. If deflation becomes embedded in the economy, it can be difficult to uproot,” said Gus Faucher, chief economist at PNC. “If prices are falling, consumers and businesses may wait to make purchases, assuming that prices will be even lower in the future; this can exacerbate economic downturns.”

Still, these measures may take some time to impact the economy fully. Troubles may continue in the short term, and inflation may become an issue in the long run, where prices may suddenly rise faster than usual.

“Over the very long term it is entirely possible, and perhaps even likely, that the policy response to this crisis will push prices higher as massive fiscal stimulus filters into the economy,” Eric Winograd, senior economist at AllianceBernstein, told CNBC. “But for that to happen, demand has to be back on a more normal footing, and we simply aren’t there right now.”

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