Washington, May 16 (Bloomberg) -- U.S. consumer prices fell in April for the first time in more than a year, due to a drop in the cost of gasoline and other fuels, economists said they expect the government to report today. The measure of inflation probably declined 0.1 percent last month, the first decrease since December 2001, after rising 0.3 percent in March, a Bloomberg News survey of economists found. Excluding food and energy, the so-called core rate probably rose 0.1 percent following no change a month earlier. Consumer demand that's running at the slowest pace in a decade is forcing companies, which are struggling to boost profits, to keep a lid on prices. That helps explain why Federal Reserve policy makers have signaled their concern about a sustained drop in prices. ``There is no pricing power'' and that is concerning the Fed, said Adrienne Warren, a senior economist at Scotia Capital in Toronto. ``Very limited pricing power and a lot of competition from imports is limiting earnings.''
The Labor Department issues the report at 8:30 a.m. Washington time. The forecast is based on the median estimate of 63 economists surveyed by Bloomberg News. The index is the most widely followed gauge of inflation and covers goods and services. Also today, the Commerce Department will probably report starts of new homes held at an annual pace that exceeded last year's 1.705 million. A 1.74 million pace of new home construction was likely for April after 1.78 million in March, according to economists surveyed. That report is also set for 8:30 a.m. Washington time.
Consumer Sentiment
Additionally, the University of Michigan's preliminary consumer sentiment index for May is forecast to rise to 87 from 86 in April, economists said. While the end of the war in Iraq has helped bolster confidence, consumers are worried about the lack of jobs in the economy. That report is expected at about 9:50 a.m. Washington time. The fall of Baghdad last month signaled the war with Iraq wouldn't be prolonged, causing oil prices to fall as fears of supply disruptions faded. The average price at the pump for all grades of gasoline in April was $1.63 a gallon, down 5.8 percent from March's $1.73 a gallon, according to the Energy Department. Prices continued to fall this month. The average reached $1.53 a gallon in the week ended Monday, the lowest since January.
Fed policy makers last week said the possibility of an ``unwelcome substantial fall in inflation, though minor'' was greater than a pickup in prices and that meant there was a greater risk the economy would be weaker than stronger in coming months. Central bankers held the benchmark U.S. interest rate at 1.25 percent, the lowest in almost 42 years. Deflation, or a sustained drop in prices, ``is becoming a concern because growth has been below potential for so long,'' said Martin Mauro, a senior economist at Merrill Lynch & Co. in New York.
Economic Growth
Most economists say the economy can grow between 3 percent and 4 percent without risking a pickup in inflation. Growth hasn't exceeded 3 percent at an annual pace for consecutive quarters since the last six months of 1999. Economists at Merrill Lynch expect central bankers will cut the benchmark rate by a quarter percentage point following their two-day meeting, which ends June 25, because of muted price increases and weak growth. The economy grew at a 1.6 percent pace in the first three months of this year as consumer spending, which accounts for 70 percent of the total, rose at a 1.4 percent rate. That matched the weakest increase since the first quarter of 1993. To spur demand, some businesses are offering more incentives and discounts. General Motors Corp., the world's largest automaker, last month led all automakers with incentive spending of $3,871 per vehicle, up 1.5 percent from March. Spending averaged $3,286 at Ford Motor Co. and $3,294 at DaimlerChrysler AG's Chrysler unit. The auto industry has been in a ``deflationary period for two years on pricing,'' Michael Jackson, chairman and chief executive officer of AutoNation Inc., the largest U.S. retailer of new and used cars, said last week in an interview. ``The burden has been borne by the manufacturers, and that's put tremendous pressure on their profit and cost equations. In better economic times, there's going to have to be more pricing power.'' Yesterday, the government reported that prices at the wholesale level fell a record 1.9 percent last month, led by the biggest decline in energy prices since 1986. Excluding food and energy costs, the index fell 0.9 percent as automobile, computer and apparel prices declined.
Services
The drop in the cost of goods is starting to affect costs for services such as medical care and housing. Medical costs rose 1.7 percent at an annual rate in the first three months of the year, compared with a 5 percent increase in 2002. An index of rental payments was unchanged in February and March. ``The relentless price competition on the goods is spilling over into services,'' said Cary Leahey, a senior economist at Deutsche Bank Securities in New York. Still, service costs have been ``too low and you will get some bounce back in coming months.'' That should allay concerns the economy will fall into a deflationary spiral, he said.//www.bloomberg.com