BondSquawk

by Rom Badilla, CFA – Bondsquawk.com

May 19, 2010

The Bureau of Labor Statistics reported that consumer prices in the US dropped in April as the Consumer Price Index (aka Headline CPI) declined 0.1 percent on a month-over-month basis while the CPI excluding Food and Energy (aka Core CPI) was unchanged for the month. Economists were expecting both headline and core CPI to increase by 0.1 percent.

The negative reading in headline CPI is the first monthly decline for the US economy since March 2009. The decline was led by a drop in gasoline prices, which is unusual given that gasoline prices typically increase in the spring, ahead of the summer driving season according to BNP Paribas. In addition, high unemployment is having an effect as less people are driving to work as commuting contributes to the demand for gasoline.

The Core CPI in April was held down by declines in apparel and furnishings while prices on new vehicles and rent remain flat. As measured on a year over year basis, Core CPI is at its lowest level since 1966.

Core Consumer Price Index YoY Historical Chart

Low level readings should raise concerns of deflation but as The New York Times mentioned that most economists believe that the threat remains remote due to a pickup in economic activity and employment gains. However as Bondsquawkers know, the recovery story is questionable in its sustainability and that signs of deflation are increasing. These low readings certainly reinforce the fact that deflation risks should be a bigger concern for the US economy and the Federal Reserve should maintain an accommodative monetary policy for quite some time.