By Timothy R. Homan May 19 (Bloomberg) -- The cost of living in the U.S. unexpectedly dropped in April for the first time in more than a year, signaling the world’s largest economy is recovering without causing prices to flare. The 0.1 percent fall in the consumer price index was the first decrease since March 2009, figures from the Labor Department showed today in Washington. Excluding food and fuel, the so-called core rate was unchanged, capping the smallest 12- month gain in four decades. Retailers such as Wal-Mart Stores Inc. are cutting prices to bolster sales as customers face almost 10 percent unemployment and rising foreclosures. The lack of inflation, which may be reined in even more by the European debt crisis, is one reason Federal Reserve policy makers have pledged to keep the benchmark interest rate near zero in coming months. “The massive slack in labor and other resource markets has sucked all the pricing power out of the economy,” Aaron Smith, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania, said before the report. “With unemployment high and wages low, it is hard to see core inflation accelerating significantly from here.” Stock-index futures held earlier losses after the report. The contract on the Standard & Poor’s 500 Index fell 0.5 percent to 1,112.8 at 8:37 a.m. in New York. Treasury securities were also lower, pushing the yield on the benchmark 10-year note up to 3.36 percent from 3.35 percent late yesterday. Rise Projected Consumer prices were forecast to rise 0.1 percent, according to the median forecast of 79 economists in a Bloomberg News survey. Estimates ranged from a drop of 0.2 percent to a gain of 0.4 percent. Costs excluding food and energy were projected to rise 0.1 percent. In the 12 months ended in April, prices rose 2.2 percent following a 2.3 percent year-over-year gain the prior month. Economists had forecast a 2.4 percent rise in the 12 months to April, according to the survey median. The core rate rose 0.9 percent from April 2009, the smallest increase since January 1966, after a 1.1 percent year- over-year advance the prior month. Compared with a month earlier, energy costs dropped. Gasoline prices fell 2.4 percent. Greek Crisis The debt crisis in Greece that has weighed on the value of the euro may keep damping U.S. inflation in coming months, according to economists such as Jay Bryson at Wells Fargo Securities LLC in Charlotte, North Carolina. U.S. exports to Europe may slow at the same time a stronger dollar holds down the cost of imported goods. Food prices, which account for about 15 percent of the CPI, rose 0.2 percent, reflecting higher meat costs, today’s report showed. Declining prices for clothing and household furnishings helped offset increases in airline fares, recreation and medical care, leading to the unchanged reading in core prices. Owners-equivalent rent, one of the categories designed to track rental prices, was unchanged. Compared with April 2009, owners-equivalent rent dropped 0.2 percent. The Fed’s long-term forecast for its preferred measure of inflation, the Commerce Department’s index tied to consumer spending and excluding food and fuel, calls for gains in a range of 1.7 percent to 2 percent. That gauge, typically lower than the CPI, was up 1.3 percent in the 12 months through March. Price Cuts Price cuts through the recession helped Wal-Mart Stores Inc., the world’s largest retailer, boost sales last year while competitors reported declines. This year, the retailer has reduced prices on gas grills, lawn mowers and Procter & Gamble Co.’s Crest toothpaste and Bounty paper towels in so-called rollbacks aimed at bolstering sales growth. The Bentonville, Arkansas-based company yesterday said it plans additional U.S. price reductions on items including cereal, ice cream and laundry detergent in coming months. Earnings in the first quarter beat the average estimate of 21 analysts surveyed as sales gains in Mexico, Canada and China made up for declines at U.S. stores. The CPI is the broadest of three monthly price gauges from Labor, because it includes goods and services. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets. To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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