Falling Energy Prices Lead to First 12-Month Drop in Consumer Prices since 1950s

April 16, 2009 - 5:48 PM
Consumer prices fell in March for the 12 month in a row thanks to a 39 percent drop in gasoline prices and a 23 percent decline in overall energy costs.

Venezuelan President Hugo Chavez has unveiled a series of measures to offset falling oil revenues that account for about 50% of the national budget. (AP photo).

(CNSNews.com) – Fueled by a 39 percent drop in gasoline prices and a 23 percent decline in overall energy prices, the Consumer Price Index (CPI) fell in March for the 12 month in a row, according to the U.S. Department of Labor.
 
It’s the first 12-month decline in consumer prices in the United States since August of 1955.

Overall prices dropped 0.4 percent in March, according to data released by the federal Bureau of Labor Statistics (BLS). The March 2009 index was 212.709 -- down 0.819 from the 213.528 figure of March a year ago. 

It was the first 12 month decline since the price index dropped from 26.9 to 26.8 between August 1954 and August 1955, according to Stephen Reed, an economist with the BLS.

Reed said the drop in CPI is most directly related to falling energy prices, which he said have resulted from declining prices for crude oil and less demand for energy resulting from slowed economic activity.

“By far the biggest factors are energy costs, which, of course, up until last summer were rising rather sharply -- and since last summer have fallen pretty dramatically,” he told CNSNews.com. 

Other areas that have experienced a decline during in prices during the past year include lodging away from home, used cars and airline fares, according to BLS data.
 
The Consumer Price Index (CPI) is a broad measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Technically, the index shows the nation is in a deflationary period, but according to Reed, the relative stability and moderate growth of prices in some categories suggests the economic climate is not as bleak as the term “deflation” would connote, the government economist said. 

“In a technical sense, you could call this deflation since prices have fallen over a 12-month period,” Reed told CNSNews.com. “But it’s not as if prices throughout the whole economy, in all sorts of different categories are falling. It’s really due to energy. This is not broad enough for most economists to consider a true deflation situation.”
 
When seasonally adjusted for changes that normally occur on an annual basis such as production cycles and sales, the CPI actually decreased by only 0.1 percent in March after rising 0.4 percent in February. But seasonally adjusted figures
 
In fact, when food and energy are excluded, other prices actually increased in March (.02 percent), for third time in as many months. Tobacco and smoking products jumped by 11 percent in March, accounting for more than 60 percent of last month’s rise. 

Prices on new vehicles also rose by 0.6 percent. 

Though the CPI data might fit the definition of deflation, economist Dan Mitchell, a senior fellow at the libertarian Cato Institute in Washington, D.C., told CNSNews.com the CPI definitely shows that producers and consumers are responding to the recession. 

"We’re primarily experiencing a recession, and in a recession people tend to be a lot more cautious about what they’re buying and that encourages firms to lower their prices,” Mitchell told CNSNews.com. 

Mitchell said it is also possible the Federal Reserve is “being too easy” and releasing too much money into circulation, but he said it would be a stretch to say that real deflation is occurring. 

“Prices tend to come down in a recession – period. In doesn’t mean the Fed is deflating. It doesn’t mean there’s inflation. It means that the recession is just dominating everything else,” Mitchell added.