WHY PROSPECT OF DEFLATION COULD POSE A THREAT TO US ECONOMY

The economic paralysis caused by the coronavirus led in April to the steepest month-to-month fall in U.S. consumer prices since the 2008 financial crisis — a 0.8% drop that was driven by a plunge in gasoline prices.

And excluding the normally volatile categories of food and energy, so-called core prices tumbled 0.4%, the government said in its monthly report on consumer inflation. That was the sharpest such drop on records dating to 1957.

The business shutdowns, reduced travel and shrunken consumer spending that the virus has caused have likely sent the U.S. economy into a severe recession. The resulting drop in economic activity is exerting a powerful downward force on prices throughout the economy.

The report raises the prospect of deflation, a prolonged drop in prices and wages that typically makes people and companies reluctant to spend and can prolong a recession. Not since the Great Depression of the 1930s has deflation posed a serious economic threat in the United States.

“If deflation becomes embedded in the economy, it can be difficult to uproot,” said Gus Faucher, chief economist at PNC Financial Services.

Over the past 12 months, overall prices have risen a scant 0.3%, the smallest year-over-year increase since 2015. Core inflation has increased 1.4%, the lowest pace since 2011. With consumer prices falling, concerns have arisen that the United States might succumb to a debilitating bout of deflation for the first time in decades.