U.S. Consumer Prices Rose Less Than Forecast in May

The cost of living in the U.S. rose less than forecast in May, culminating in the biggest 12-month drop in prices in almost 60 years.

The consumer price index increased 0.1 percent after no change a month earlier, the Labor Department said today in Washington. In the 12 months ended in May, costs dropped 1.3 percent, the biggest decline since 1950.

Higher commodity prices, including gasoline, will probably restrain Americans’ discretionary spending at a time when the economy is showing signs of stabilizing. The lack of sustained gains in sales is one reason companies are finding it difficult to pass increasing costs on to customers.

“There’s not pricing power in this otherwise very weak economy,” said Richard DeKaser, chief economist at Woodley Park Research in Washington. “Inflation is going to remain very weak and over the next year will continue to weaken given the tremendous amount of slack in the economy.”

Economists forecast consumer prices rose 0.3 percent, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from a 0.1 percent decrease to a gain of 0.6 percent.

Excluding food and fuel, costs also climbed 0.1 percent, matching the median forecast. Compared with a year earlier, the so-called core rate increased 1.8 percent, down from a 1.9 percent 12-month gain in April.

Market Reaction

Treasury securities rose, erasing earlier losses, after the report showed inflation wasn’t accelerating. The yield on the benchmark 10-year note fell to 3.62 percent at 9:49 a.m. in New York from 3.66 percent yesterday.

Energy costs increased 0.2 percent in May, as a 3.1 percent rise in the cost of gasoline was partly offset by declines in fuel oil and natural gas.

A separate Commerce Department report showed the U.S. current-account deficit narrowed in the first quarter to $101.5 billion, the least since 2001, reflecting a smaller shortfall in trade of goods.

These prices may continue to rise in coming months. The average price of a gallon of regular gasoline at the pump is up 65 percent this year, reaching an almost eight-month high of $2.68 yesterday, according to data from AAA.

Gasoline Prices

Should retail gasoline prices peak at $2.75 a gallon, the increase since the start of the year will deduct $50 billion at an annual rate from household cash flows, according to a forecast by Richard Berner, co-head of global economics at Morgan Stanley in New York. The loss would offset almost all the benefit of the tax cuts from the Obama administration’s stimulus plan, he said in a June 8 report.

Food prices, which account for about a seventh of the CPI, decreased 0.2 percent in April, reflecting lower costs for all major categories including fruits and vegetables, meats and dairy products.

The core index was constrained by falling prices for public transportation, apparel and tobacco. Rents which, make up almost 40 percent of the core CPI, were also subdued. A category designed to track rental prices rose 0.1 percent.

New vehicle prices climbed 0.5 percent. Car costs may decline in coming months as automobile makers slash prices or increase incentives to revive demand and lighten bloated inventories.

Auto Incentives

Chrysler, seeking to restructure under bankruptcy, began offering five-year, no-interest loans on some models this month. The financing, announced June 3, runs through July 1 and is an alternative to rebates of as much as $6,000 for consumers who buy through certain credit unions and already own a Chrysler vehicle. The cash option was put in place last month.

Macy’s Inc. was among retailers cutting prices to clear stockpiles. Aeropostale Inc. earlier this month was offering 20 percent off women’s dresses. American Eagle Outfitters Inc. was giving 50 percent off the purchase of a second graphic t-shirt.

The CPI is the broadest of the three monthly price gauges from Labor because it includes goods and services. The cost of goods imported into the U.S. rose 1.3 percent in May, the government reported last week. Wholesale prices increased a smaller-than-anticipated 0.2 percent, the department said yesterday.

Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

Fed President

Richard Fisher, president of the Federal Reserve Bank of Dallas, this week dismissed concern that the central bank’s record purchases of assets will cause inflation to soar. Fisher, who describes himself as among the most aggressive inflation fighters on the Federal Open Market Committee, said it’s inappropriate to be overly concerned on price pressures now because of the amount of “slack” in the economy.

Fed policy makers meet to discuss the direction of interest rates next week. Concern over the amount of money the Fed has pumped into financial markets and the size of upcoming government securities auctions to pay for stimulus efforts has caused interest rates on Treasuries to shoot higher in recent weeks.