Price rollback in U.S. economy

WASHINGTON (MarketWatch) -- U.S. consumer prices likely fell in April for the first time in a year, putting further pressure on the Federal Reserve to keep interest rates low to stimulate more growth, economists said.

"We continue to see significant disinflationary pressures in the U.S. economy," wrote David Resler, U.S. economist for Nomura Securities.

"Inflation is still not a serious worry for U.S. policymakers, who are more focused on shepherding a fragile economy onto a sustainable growth path," said Meny Grauman, an economist for CIBC World Markets.

The consumer price index, which will be released by the Labor Department on Wednesday, is the most significant U.S. economic release of the coming week. Other numbers to watch include April housing starts on Tuesday, regional manufacturing surveys for May on Monday and Thursday, and the weekly jobless claims data on Thursday.

The CPI probably fell 0.1% on a seasonally adjusted basis in April, according to the median forecast of economists surveyed by MarketWatch. It would be the first decline in the CPI since March 2009.

Energy prices led the way lower in April, but other prices were flat or falling, economists said. Gasoline prices at the pump rose about 8 cents a gallon during the month, but that's less than the usual seasonal gain in April. After seasonal adjustments, prices probably fell, economists said.

Food prices also cooled after a big jump in March due to killing frosts, they said.

The core CPI -- which strips out food and energy prices in order to get a better view of underlying inflation -- probably rose 0.1% in April, our survey says. Despite the small increase in April, the year-over-year increase in the core CPI probably decelerated to 1%, the lowest since 1966.

Through March, the headline CPI was up 2.4% over the past year, but most of the increase was due to a surge in global energy prices as crude oil prices partially rebounded from the dramatic 70% decline in 2008. In the past year, consumer energy prices are up 18%, but other consumer prices are up just 1%, the smallest increase in 45 years.

Many prices are falling. Shelter costs are down 0.5% in the past year. Prices of food consumed at home are down 0.7%. Apparel prices are down 0.4%. Recreation prices are down 1.1%.

Besides energy, medical care prices have been the other main driver of higher prices, rising 3.7% in the past year.

Used-car prices are up 16.3%, with most of that gain coming since August, when the government's cash-for-clunkers program slashed the supply of used cars.

The immediate outlook for prices is more of the same: "There is a distinct possibility that top level prices will move down, while core prices are not expected to see any significant change in direction," wrote Brian Bethune and Nigel Gault, economists for IHS Global Insight.

But other economists believe the core CPI figures have been artificially depressed by several one-time factors. They agree that inflationary pressures are low, just not as low as the CPI says they are.

"The degree of deceleration appears exaggerated," wrote Maury Harris, chief U.S. economist for UBS. "Rents are stabilizing; and the slowing in nonhousing core prices appears to reflect exaggerated declines in apparel, airfare, and tobacco."

Disinflation has been caused by the vast amount of slack capacity in the economy, especially high unemployment. "The amount of slack will remain large for a while, even as it declines," wrote Jim O'Sullivan, chief economist for MF Global and the winner of the Forecaster of the Month award from MarketWatch.

"Still, we expect at least some offset from the pickup in growth," O'Sullivan said. "The recent pickup in employment is likely to stop the slowing in the rental components -- demand for rental properties is closely correlated with employment growth."

Already, rents are rising, according to UBS analysts. That's one factor that's making home builders just a bit more optimistic. According to MarketWatch's survey, housing starts are expected to rise about 4% in April to a seasonally adjusted annual rate of 650,000.

New construction may be slowly reviving, but the level of starts would still be 70% lower than the peak in 2006 and would be about 30% lower than the long-run level needed to meet the needs of new households, said Grauman of CIBC.

With so many vacancies and so many foreclosures looming, new construction will probably remain below normal levels for two more years, said economists at Global Insight.

http://www.marketwatch.com/story/pri...omy-2010-05-16