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Consumer prices had their biggest drop ever. Is that a good thing?

Paul Davidson, USA TODAY
Published 4:43 p.m. ET May 12, 2020 | Updated 5:47 p.m. ET May 13, 2020

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You may be cheering the arrival of lower prices for some goods and services as perhaps the only silver lining in the devastating coronavirus pandemic. A core measure of inflation fell 0.4% in April, the largest monthly decline on record, the Labor Department said Tuesday.

But before you pop the champagne, let’s put the numbers in perspective. USA TODAY economics reporter Paul Davidson sorts through the figures.

How much did average prices fall?

The overall consumer price index dropped 0.8% last month, mostly because of plunging oil prices. Demand for oil and gasoline has plummeted around the globe because of stay-at-home orders that are keeping people from driving and a steep drop in air travel as well. Oil prices are set in a global marketplace.

At the same time, grocery prices partly offset the slide in energy costs, climbing 2.6% as Americans ate at home more and the U.S. faced widespread supply shortages, particularly the shutdown of meatpacking plants amid employee COVID-19 cases.

Is that the best measure of prices?

No. Both food and energy prices are volatile because of sharp swings in supply and demand. Economists typically follow the core consumer price index, which excludes food and energy costs. Yet even that reading dropped 0.4% last month, the highest on record.

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Why did it fall so sharply?

Restaurants, malls, movie theaters and other service businesses largely were shut down across the country since mid-March, while consumers have shunned airplane flights and hotels out of fears of contagion. When demand declines so dramatically, suppliers respond with lower prices. Last month, air fares nosedived 15.2% while prices fell 7.1% for hotels, 7.2% for auto insurance and 4.7% for apparel. Many auto insurance companies gave consumers credits, refunds or discounts, Bank of America said in a research note.

Does that mean the country is now experiencing deflation, or a fall in prices?

No. Monthly price changes can be volatile. Deflation refers to a decline in prices on a year-over-year basis. Prices for the items listed above indeed have fallen annually, with air fares down 24.3%; hotels, 14%; auto insurance, 6.2%; and apparel, 5.7%. But the core consumer price index overall is still up 1.4% over the past year while total consumer prices, including food and energy, are up 0.3% annually.

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Even if those indexes were to drop year-over-year for a month or two, that would not amount to deflation, says economist Ryan Sweet of Moody’s Analytics. The yearly price drop would have to persist for 6 to 9 months, he says.

Could that happen?

At this point, it’s unlikely. Most economists believe consumer demand will begin to rebound in the second half of the year as states continue to reopen their economies, pulling the nation out of the current recession. That should support price increases, Sweet says. Although demand is not expected to return to pre-pandemic levels until a vaccine is available or even later, the recovery should support price increases. Both Moody’s and Barclays foresee the core CPI index dipping to 1% or below in coming months, but the drop is likely to be temporary.

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There’s even a chance the crisis could lead to a spike in inflation as demand begins to recover and supplies of some goods and services remain limited because of the virus, Capital Economics says.

Is there a chance that deflation could persist?

Yes. If the U.S. is hit by a second wave of the coronavirus that throws the economy for another wallop, that could depress consumer demand and prices, Sweet says.

Deflation, or faling prices, sounds like a good thing. Is it?

No. Sure, you might save some money on certain products and services. But the reason air fares and hotel prices are so low is that Americans aren’t traveling and for sound health reasons. Low prices don’t do much good if consumers aren’t spending. What’s more, deflation is not good for the economy. It prompts people to put off purchases on the expectation that prices will fall further, hurting economic growth. And since companies are charging lower prices, they’ll probably need to pay you less. That’s definitely not a good thing.

Read or Share this story: https://www.usatoday.com/story/money/2020/05/12/coronavirus-core-consumer-prices-fell-most-ever-time-celebrate/3119265001/

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