Consumer Prices Remain Flat As Manufacturing Drop Eases

Inflation at the consumer level remains almost non-existant, while the sllowdown in US manufacturing appears to be easing, according to the latest government reports.

Consumer prices were unchanged in April as expected, but recorded their largest 12-month drop since 1955, as sluggish consumer demand limited companies' pricing power.

The Labor Department said its closely watched Consumer Price Index was flat after falling 0.1 percent in March.

Compared to the same period last year, consumer prices fell 0.7 percent, the biggest 12-month decline since June 1955. In March, the year-over-year CPI rate fell 0.4 percent.

Subdued consumer demand as rising unemployment erodes household incomes and general slack in the economy have robbed companies of pricing power.

"The bears are going to look at this and say we have deflation on the way and a decelerating economy, but I don't think that's the case. I think this will be viewed as a healthy contraction that will lead to a sustainable recovery," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, N.J.

The Federal Reserve, which has pumped over trillion dollars into the economy in a bid to break its downward spiral, is worried about deflation although it sees the risks as diminishing.

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Deflation is a broad-based decline in prices that can undercut an economy by leading consumers to hold off purchases in the hopes of even lower prices.

Core prices, which exclude food and energy items, rose a faster 0.3 percent, driven by a second consecutive large gain in the cost of tobacco as a government excise tax went into effect.

Core prices, which had increased by 0.2 percent in March, were also boosted by increases in medical care and new vehicles in April.

Analysts polled by Reuters had predicted a 0.1 percent increase in core CPI in April. Core prices rose 1.9 percent year over year after a 1.8 percent rise in March.

Energy prices fell 2.4 percent after dropping 3.0 percent the previous month. The food index fell 0.2 percent in April, the largest drop since May 2002 and the third straight monthly decline.

Manufacturing Contraction Declines

In other economic news, the Fed said nation's industrial production fell in April by the smallest amount in six months, evidence that the pace of the economy's decline is slowing.

The Fed says output by the nation's factories, mines and utilities fell 0.5 percent last month, after revised declines of 1.7 percent in March and 1 percent in February. Analysts expected a drop of 0.6 percent last month.

Still, the report shows U.S. industry remains weak. Industrial production has fallen in 15 of the 17 months since the recession began in December 2007, and is down 16 percent since then.

A gauge of manufacturing in New York State also signaled slowing contraction in May after hitting a record low only two months earlier, the New York Federal Reserve said in a report Friday.

Most components in the regional Fed reports supported the view of stabilization in the manufacturing sector, despite a pullback in new orders stemming from sluggish global demand.

The New York Fed's "Empire State" general business conditions index climbed to minus 4.55 in May--its highest since August 2008--from minus 14.65 in April. In March, the index sagged to minus 38.23, its weakest since its launch in July 2001.

A reading below zero suggests manufacturing contraction.

Economists polled by Reuters had expected a May reading of minus 12.0.

The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions.

Moreover, the regional Fed's index on future business conditions rose to 43.8, its highest since October 2007.

The regional Fed's employment index climbed to minus 23.86 in May from minus 28.09 in April, while its shipment index rose to 1.29, the first time it was above zero since last summer, prior to the peak of the financial crisis.

Its inventory reading increased to minus 21.59 from a record low of minus 35.96 in April.

On the price front, the report's prices paid index rose to minus 11.36 from minus 14.61 in April, but its prices received component stumbled to a record trough of minus 27.27 from April's minus 17.98.

These tentative signs of stabilization were offset by a drop in new orders, seen as the most reliable predictor of manufacturing activity.

The report's new order index retreated to minus 9.01 from minus 3.88 in April when it posted a huge 40-point jump from March.

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