By Timothy R. Homan June 17 (Bloomberg) -- The cost of living in the U.S. dropped in May for a second month, signaling the world’s largest economy is recovering without causing prices to flare. The 0.2 percent decline in the consumer price index was the biggest since December 2008 and followed April’s 0.1 percent decrease, figures from the Labor Department showed today in Washington. Excluding food and fuel, the so-called core rate increased 0.1 percent. The figures matched the median forecasts in a Bloomberg News survey. 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 gives Federal Reserve policy makers scope to leave the benchmark interest rate near zero in coming months and help invigorate the economy. “The Fed is not going to worry too much about inflation, at least for a while,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said before the report. “The only thing that could get the Federal Reserve to even consider raising rates is an upturn in inflation.” The Labor Department also reported today that initial jobless claims rose 12,000 last week to 472,000. Economists surveyed by Bloomberg had forecast a decline to 450,000, according to the median estimate. Consumer prices were forecast to decline 0.2 percent, according to the median forecast of 79 economists in a Bloomberg survey. Estimates ranged from a drop of 0.4 percent to a gain of 0.1 percent. Year Over Year In the 12 months ended in May, prices rose 2 percent following a 2.2 percent year-over-year gain the prior month. Economists had forecast a 2 percent rise in the 12 months to May, according to the survey median. The core rate rose 0.9 percent from May 2009, matching the smallest year-over-year gain since 1966. Compared with a month earlier, energy costs decreased 2.9 percent. Gasoline prices declined 5.2 percent, the biggest drop since December 2008. The debt crisis in Greece that has weighed on the value of the euro may keep damping U.S. inflation in coming months, and American 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, were unchanged. Fruit and vegetable prices declined, while costs of meats and dairy products increased, today’s report showed. Housing Costs Housing costs remain limited. Owners-equivalent rent, one of the categories designed to track rental prices, was unchanged for a second month and down 0.3 percent from May 2009. The core index was boosted in May by higher costs for clothing and medical care. Procter & Gamble Co., the world’s largest consumer-products company, said yesterday that price increases may provide a boost to sales growth in the next fiscal year. In the meantime, pricing may be negative for the “next quarter or two,” Chief Financial Officer Jon Moeller said at a meeting with investors in Paris. “We are not expecting strong growth in really any of the developed markets,” Moeller said. Sales in western Europe and the U.S. will increase at rates lower than their historical average, the executive said. 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 1.2 percent in the 12 months through April. ‘In The Recession’ Some lower-income customers in the U.S. are “still deeply in the recession” and are shopping various retailers for the cheapest prices, Jamie Sohosky, senior director of marketing for Wal-Mart’s U.S. stores, said this month. Shoppers at Wal-Mart, the world’s largest retailer, are also using more coupons than a year ago, Sohosky said. They’re worried about losing their jobs and paying mortgages, she said. 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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