US consumer prices record largest drop in five years

US consumer prices fell by the most in more than five years in March and further decreases are likely as the novel coronavirus outbreak suppresses demand for some goods and services, offsetting price increases related to shortages resulting from disruptions to the supply chain.

With the country virtually at a stand-still and the economy rapidly contracting as state and local governments adopt stiff measures to control the spread of COVID-19, the respiratory illness caused by the coronavirus, economists are predicting a period of disinflation or even outright deflation.

The Labour Department said on Friday its consumer price index dropped 0.4% last month amid a tumble in the costs of gasoline, hotel accommodation, apparel and airline tickets. That was the biggest drop since January 2015 and followed a 0.1% gain in February. In the 12 months through March, the CPI rose 1.5% after increasing 2.3% in February.

Economists polled by Reuters had forecast the CPI dropping 0.3% in March and climbing 1.6% year-on-year.

The general price level decline is expected even as the Federal Reserve has adopted extraordinary measures to stop the economy's free-fall. President Donald Trump last month signed a historic $2.3 trillion package to aid businesses and workers.

The widespread business closures impacted March's CPI report, with data collection by personal visit suspended on March 16, the Labour Department said. It said data collection last month was also impacted "by the temporary closing or limited operations of certain types of establishments," leading to "an increase in the number of prices being considered temporarily unavailable and imputed."

That resulted in many indexes being based on smaller amounts of collected prices than usual, and a small number of indexes that are normally published were not published in March.

Excluding the volatile food and energy components, the CPI dipped 0.1% in March, the first drop since January 2010. The so-called core CPI had increased 0.2% for two straight months. Underlying inflation fell in March also as prices for new motor vehicles declined. In the 12 months through March, the core CPI rose 2.1% after increasing 2.4% in February.

The Fed tracks the core personal consumption expenditures (PCE) price index for its 2% inflation target.

The core PCE price index increased 1.8% on a year-on-year basis in February after rising 1.7% in January. It undershot its target in 2019. With some components in the producer price index report that feed into the core PCE price index weakening in March, economists expect inflation pulled back last month.

March's core PCE price index data will be released at the end of the month. The closure of businesses could, however, impact the collection of inflation data in the coming months, making the reports unreliable.

In March, gasoline prices plunged 10.5%, the most since February 2016, after dropping 3.4% in February. Food prices rose 0.3% last month after surging 0.4% in February. Prices for food consumed at home increased 0.5%, matching February's gain.

Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3%. That followed a 0.2% gain in February. The cost of hotel and motel accommodation tumbled a record 7.7% last month. Airline fares dropped 12.6% last month, the biggest decline on record.

Healthcare costs rose 0.4% after edging up 0.1% in February. Apparel prices dropped a record 2.0% last month after increasing 0.4% in February. New vehicle prices fell 0.4%, the largest drop since April 2018. But prices for used motor vehicles and trucks rose 0.8% after rebounding 0.4% in February.