(CN) – U.S. consumer prices fell 0.4% last month, marking the largest decline in five years as gas costs plummeted while Americans practiced social distancing and stayed at home.
The government’s consumer price index, a measure of inflation that tracks changes in what Americans pay for a wide range of products, is up only 1.5% from a year ago, a sign of low inflation pressures.
Accounting for much of the monthly change — the largest drop since January 2015 – gasoline costs fell 10.5% in March as most Americans were placed under stay-at-home orders because of the Covid-19 pandemic. Airfares dropped by 12.6% and hotel costs sank by 6.8%.
Food prices went up 0.3% — including 0.5% for food at home and 0.2% for food away from home — as demand was pushed up by consumers emptying grocery store shelves.
Excluding the always volatile food and energy categories, so-called core consumer prices decreased just 0.1% in March and are up 2.1% from a year ago, according to a Labor Department report released Friday.
Joel Naroff of Naroff Economic Advisors said the monthly drop in consumer prices was expected given the virus-driven economic collapse and pointed to a possible silver lining.
“In some respects the relatively mild decline in consumer prices and the flat change excluding energy is good news,” he wrote. “Core inflation, which excludes volatile food and energy, had been slowly climbing back to target levels. A massive collapse in the economy was expected to lead to a major deceleration in inflation, which could be worrisome. That did not happen.”
Looking ahead, Naroff said there could be a major rebound in economic activity when closed sectors are reopened, but it will be the following months that matter as the U.S. recovers from an unemployment rate that could get as high as 20%. After an initial rebound, he said, the recovery could be slow as government aid money goes away and businesses need to rely solely on revenue to pay workers.
“Investors may think that the problems are behind us, but reopening and repairing the economy is not going to be easy and it will take a long time,” Naroff said.
On Thursday, the Labor Department reported that the producer price index – another measure of inflation that tracks cost changes before they reach the consumer marketplace – dropped 0.2% in March. Wholesale prices are up 0.7% from this time last year.
Not counting the food, energy and trade categories, core wholesale prices also fell by 0.2% last month and are up 1% from a year ago.
Even before the Covid-19 pandemic, annual inflation rates have consistently stayed below the Federal Reserve’s 2% target. Last year, the central bank cut its key interest rate three times in light of the low inflation pressures as well as President Donald Trump’s trade war and fears of a global slowdown.
As the virus outbreak took hold of the U.S. economy, the Fed slashed its benchmark short-term rate to a range of 0% to 0.25% last month.
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