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Last Updated: Friday, 16 May, 2003, 15:05 GMT 16:05 UK
US inflation drops to 37-year low
Shoppers in Fifth Avenue, New York City
Deflation could lead consumers to hold back purchases
Underlying US inflation has dropped to a 37-year low, increasing fears that the world's largest economy faces the prospect of a damaging period of deflation.

Consumer prices excluding energy and food were 1.5% higher in April compared with a year previously, the Labor Department said.

It was the lowest year-on-year rise since March 1966. The month-on-month figure was flat for the second consecutive month - the first time this had happened since 1982.

Analysts said the figures raised fears that prices would start falling across the economy - something US economic policymakers are keen to avoid.

Optimistic

The experience of Japan - the world's second biggest economy - is that deflation can be difficult to reverse.

Whether this will be enough to move the Fed to cut rates is still a huge question mark
Laura Rhame, Brown Brother Harriman
The danger of deflation is that it inhibits consumer and corporate spending - the rationale being 'why buy today what is cheaper tomorrow' - so holding back economic growth.

However, a closely-watched survey of consumer confidence on Friday suggested US consumers were feeling unexpectedly optimistic.

The University of Michigan index rose to a reading of 93.2, up from 86 in April.

Uncertainty

Some economists said the latest inflation figures might encourage the US central bank - the Federal Reserve - to trim interest rates from the already low level of 1.25% in an attempt to encourage spending.

"The CPI [consumer price index] number shows that the economy is still clearly in an environment of broad disinflation.

"Whether this will be enough to move the Fed to cut rates is still a huge question mark," said Laura Rhame, senior economist at Brown Brother Harriman in New York.

"This disinflation factor is adding a whole new level of uncertainty in the US economic outlook."

Dow fall

On Thursday, official figures showed wholesale prices had fallen at their steepest rate since records began.

Industrial production was also lower.

After a muted start to Friday trading, the Dow Jones index of leading US shares dropped 49 points, or 0.6%, to 8,664 by mid-morning.

"The inflation news is still dominating people's interest, and there's nothing in the Michigan numbers to change that focus," said Steve Ricchicuto, chief US economist at ABN Amro in New York.


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