Deflation disappoints

Those looking for a big negative number for consumer prices today were surely disappointed with what came - prices were flat month-to-month and down slightly from a year ago - but there are still three months to go before last year's high energy prices work their way completely through the system. We may yet get something other than "baby deflation".
The Labor Department reported consumer prices were unchanged in April following a decrease of 0.1 percent in March, lower energy costs offsetting higher prices for tobacco products and the relentless rise in domestic services such as medical care and education.

On a year-over-year basis, the government's measure of the cost of living fell 0.7 percent on an unadjusted basis (down 0.6 percent when seasonal variations are taken into account), the largest annual decline since the mid-1950s, but a minuscule drop compared to the double-digit annual price declines of the 1930s.

Paced by a drop of 2.8 percent in the cost of gasoline, energy prices fell 2.4 percent in April, now down 25.2 percent from a year ago. Food prices fell 0.2 percent last month but are 3.3 percent higher on a year-over-year basis and medical care and education costs continued to rise, now sporting annual gains of 3.0 percent and 3.4 percent, respectively, making talk of "deflation" something of a sore joke to anyone paying medical bills or tuition.

As shown below, falling energy prices are still the dominant factor in the year-over-year comparisons. If energy is removed from the index, prices would be a full 1.3 percent higher than a year ago rather than the much discussed negative number that stirs fear of a repeat of depression-era price declines. As the one-year anniversary of the mid-2008 energy price spike approaches, there remains the possibility that year-over-year comparisons will go a bit further into negative territory, but this is really a side-show to the more important story of prices for food and domestic services, all of which continue to rise.