Deflation fears over US price dip

Car production and prices fell in April

Wholesale prices in the United States have fallen at their steepest rate since records began, sparking fears about deflation.

The cost of energy, cars, trucks and cigarettes slid in April, dragging the producer price index down by 1.9% over the month.

At the same time industrial production has continued its fall.

The Federal Reserve has already said that downward pressure on prices is now a greater threat than inflation.

Most of the decline is due to falling oil prices and that's due to the end of the Iraq war

Peter Cardillo, Global Partners Securities

Deflation would hit the economy because people would be persuaded to put off spending in the hope that prices would fall further.

"It has been obvious that wholesale prices, raw material prices, have been coming down, and this is just another indication of how soft pricing power is - it is really non-existent.

"This is exactly what the Fed is concerned about," said Joel Naroff, president of Naroff Economic Advisors.

Falling car production

Peter Cardillo of Global Partners Securities agreed: "This is a very weak inflation number and will certainly raise some concerns regarding deflation.

But he added: "Most of the decline is due to falling oil prices and that's due to the end of the Iraq war."

Energy prices fell 8.6% over the month, car prices were 2.6% lower, truck prices dropped 4.6% - their largest fall for 21 years - and cigarette prices dropped 9.6%.

These falls brought about the sharpest fall in the producer price index since it was first compiled in 1947.

Separate figures showed that production in the United States fell by 0.5% in April for the second month in a row.

The industrial sector has been hard hit by the sluggish economy.

But although the rate of motor vehicle production fell, output of high-tech equipment, such as computers and semiconducters, increased.