ECONOMY Price drop raises deflation fears

The Fed could cut interest rates to avert that risk.
WASHINGTON (AP) -- Consumer prices fell by 0.3 percent in April, the biggest decline in 18 months, led by a retreat in energy prices as the Iraq war wound down. Prices for cars, clothes and food also went down.
Although today's report from the Labor Department made clear that inflation isn't a problem for the struggling economic recovery, it could raise more concerns over whether the United States is heading down a path of a destabilizing fall in prices.
April's decline in the Consumer Price Index, the government's most closely watched inflation gauge, came after prices rose by 0.3 percent in March.
The drop in April's prices was the biggest since October 2001 and was deeper than the 0.1 percent dip economists were forecasting.
Keeping watch
Federal Reserve chairman Alan Greenspan and his colleagues are on guard for any signs of deflation -- prolonged and widespread decline in prices -- in the U.S. economy. Though they say the chances of deflation cropping up are remote, Fed policy-makers last week signaled that they were prepared to lower short-term interest rates to ward off even the threat of that happening.
Private economists said the Fed's concerns over deflation raised the odds of a cut in the federal funds rate, now at a 41-year low of 1.25 percent, at the central bank's next meeting June 24-25.
Much of the weakness of consumer prices in April stemmed from a 4.6 percent drop in energy prices as the war in Iraq came to an end. In March, energy prices, stoked by war tensions, rose by 4.6 percent.