Consumer Prices Rise Less Than Expected in May

June 17, 2009 - 12:46 PM
Consumer prices rose less than expected in May, fresh evidence that the recession is keeping inflation in check.

Bernie Mango returns the nozzle after pumping gas in North Andover, Mass. Monday, June 15, 2009. Gas prices rose Monday for the 48th straight day, matching a record going back to at least the 1970s, with prices now up nearly two-thirds since the beginning of the year even as demand from motorists remains weak. (AP Photo/Elise Amendola)

Washington (AP) - Consumer prices rose less than expected in May, fresh evidence that the recession is keeping inflation in check.
 
The Labor Department reported Wednesday that the consumer price index rose a seasonally adjusted 0.1 percent last month, below analysts' expectations of a 0.3 percent rise.
 
Excluding volatile food and energy costs, core prices also increased 0.1 percent, matching expectations.
 
Low inflation enables the Federal Reserve to keep a key short-term interest rate near zero, where it has been for months.
 
The recession is holding down prices as the unemployment rate has reached a 25-year high and factories are operating at record-low levels. Workers concerned about their jobs are less likely to push for higher pay, while low consumer demand has made it difficult for companies to raise prices.
 
Gasoline prices rose 9.6 percent in May, before seasonal adjustment, the department said. But they are still much lower than last year, when prices at the pump topped $4 a gallon during the summer.
 
Due to that decline, consumer prices fell 1.3 percent in the 12 months ending in May, the steepest drop in 59 years. The core CPI has increased 1.8 percent since last year.
 
Food prices in the U.S. fell for the fourth straight month in May, the department said, as costs fell for all six of the major grocery food groups, including fruits and vegetables, meats and poultry, and dairy products.
 
Tobacco prices fell 0.3 percent after two months of large increases. Cigarette makers increased prices in the spring ahead of a steep tax increase.
 
Still, falling prices can raise fears about deflation, a destabilizing period of extended declines. Lower prices may seem like a good thing, but deflation can cause consumers to postpone purchases, leading to drops in production and wage cuts.
 
But most analysts say efforts by the Fed to stimulate the economy will prevent that from occurring.
 
Besides lowering its benchmark interest rate to record lows, the Fed has taken other measures to flood the banking system with cash to counter a severe credit crisis.
 
There are concerns about deflation in other parts of the world, especially in Japan, where prices have been falling. That country underwent a destabilizing bout of deflation during the 1990s, when the world's second largest economy struggled to emerge from a real estate and banking crisis.
 
Price declines also have been registered in China and India.
 
A group of economists from the nation's largest banks predicted Tuesday that prices will continue to fall this year. The American Bankers Association's Economic Advisory Committee projects that core consumer prices will decline at a 1 percent annual rate by the end of 2009.
 
But Bruce Kasman, chief economist for JPMorgan Chase & Co. and chairman of the committee, said inflation is a greater risk than deflation over the next several years, due to huge budget deficits topping $1 trillion this year and next.
 
Many economists don't expect the Fed to raise interest rates until the unemployment rate stops rising. It rose to a 25-year high of 9.4 percent in May and many forecasters believe the jobless rate will top 10 percent by year's end.