U.S. annual inflation slid deeper into negative territory in May as consumer prices posted their largest annual decline in almost 60 years

TO BE NOTED: From the WSJ:

"Consumer Prices Show Little Evidence of Inflation Threat

By BRIAN BLACKSTONE

WASHINGTON -- U.S. annual inflation slid deeper into negative territory in May as consumer prices posted their largest annual decline in almost 60 years.

Still, a slight rise from the prior month and an increase in core prices that exclude food and energy support the growing sentiment at the Federal Reserve that deflation risks have waned. However, there's little evidence that inflation is taking hold, either, a concern that has crept into bond markets in recent weeks.

The consumer price index rose 0.1% in May from April, the Labor Department said Wednesday, below economist expectations for a 0.3% increase in a Dow Jones Newswires survey.

The core CPI, which excludes food and energy prices, also rose 0.1%, in line with expectations.

Unrounded, the CPI rose 0.096% last month. The core CPI advanced 0.145% unrounded.

Consumer prices fell 1.3% compared to one year ago, the largest 12-month decline since April 1950. That's way below the 2% annual rate of inflation that most Fed officials think is consistent with their dual mandate of price stability and maximum employment.

Earlier this month, San Francisco Fed President Janet Yellen said that after once favoring 1.5% as an inflation objective, "I think if I now had to write down a number, I'd probably write 2%."

Annual inflation was above 5% as recently as last August, before last year's energy and commodity price drops kicked in and the global recession eased pressure on import prices.

But the annual CPI decline aside, Ms. Yellen and others at the Fed have little to worry about. Annual inflation rates should turn positive later this year given the recent rise in energy prices. And the less-volatile core CPI index was up 1.8% in May from one year ago, which is more in line with the Fed's objective.

"The recent data on inflation shows that the risks of deflation, which entered the minds of many central banks around the world over the last 18 months, the risks seem to be significantly attenuated," Fed Governor Kevin Warsh said Tuesday. Rather, inflation dynamics are "closer to a zone of price stability," he said.

According to Wednesday's CPI report, energy prices rose 0.2% in May from April, and were down 27.3% over the last 12 months. Gasoline prices rose 3.1% last month, while food prices slid 0.2%.

Transportation prices, meanwhile, increased 0.8%. Airline fares fell 1.5%, though new vehicle prices increased 0.5%.

Housing, which accounts for 40% of the CPI index, fell 0.1% for a third-straight month. Rent increased 0.1%, as did owners' equivalent rent. Household fuels and utilities prices slid 1.3%. Lodging away from home advanced 0.1%.

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.3% in May, an indication that paychecks aren't keeping pace with prices, which could threaten consumer spending.

Current Account Deficit Shrinks

A broad measure of U.S. international transactions shrank in early 2009 because of the recession to its smallest level in seven years.

The U.S. current account deficit dropped to $101.5 billion during January through March, the Commerce Department said Wednesday. The deficit was the smallest since fourth-quarter 2001.

The $101.5 billion deficit exceeded economists' expectations for a deficit of $85.0 billion in the first quarter.

In the fourth quarter, the deficit stood at $154.9 billion, revised up from an originally reported $132.8 billion.

The current account balance combines trade of goods and services, transfer payments, and investment income.

The first-quarter shortfall of $101.5 billion made up 2.9% of gross domestic product, which was last reported at $14.090 trillion in current dollars for the three months ended March 31. That was the smallest share of GDP since 2.8% in first-quarter 1999. The record high was 6.6% at the end of 2005. The fourth-quarter 2008 current account gap of $154.9 billion represented 4.4% of a GDP of $14.200 trillion.

GDP is the broad measure of economic activity in the U.S.

Most of the current account balance is made up of trade in goods and services. A $91.2 billion first-quarter shortfall in goods and services trade was lower than the fourth-quarter's revised $144.5 billion. The fourth-quarter gap was initially estimated at $140.4 billion.

First-quarter imports fell to $373.4 billion from $469.4 billion. "All major and most sub-major commodity categories decreased," Commerce said.

Exports fell also. First-quarter sales dropped to $249.4 billion from $290.6 billion, with declines in chemicals, petroleum, capital goods, and cars.

While U.S. trade of goods was at a deficit, services trade was at a surplus. The surplus fell, though, to $32.8 billion from $34.3 billion in the fourth quarter.

Also contributing to the current-account deficit was a $29.6 billion shortfall in unilateral current transfers. Transfers are one-way payments from the U.S. to other countries and one-way payments from abroad into the U.S. The $29.6 billion shortfall is smaller than a $31.5 billion deficit in the fourth quarter.

Examples of current transfers include U.S. government grants, foreign aid, private remittances to workers' families abroad, and pension payments to foreign residents who once worked in a particular country.

Offsetting the overall current-account deficit was a $19.3 billion surplus of income, down from a $21.1 billion surplus in the fourth quarter.

The trade report showed that foreigners bought a net $56.9 billion of U.S. Treasury securities during the quarter, down from $81.5 billion of purchases in the prior three months.

Foreigners sold $15.5 billion worth of U.S. corporate bonds during the quarter, after net sales of $3.8 billion the previous quarter. They sold $45.3 billion of agency bonds, up from $21.4 billion in fourth-quarter sales.

Meanwhile, foreigners bought a net $6.0 billion of U.S. stocks, after selling $3.9 billion in the fourth quarter.

A Treasury Department report Monday said foreign and U.S. investors moved capital out of U.S. assets in April, the first month of the second quarter. The switch in capital flows reflect investors' greater appetite for risk. Net outflows in April, including short-term securities and changes in bank deposits, totaled $53.2 billion, according to the Treasurys International Capital report, compared with the inflows of $25 billion in March.

Wednesday's Commerce Department data said foreign direct investment in the U.S. increased $35.3 billion, after rising $96.8 billion in the fourth quarter. "The slowdown was more than accounted for by a slowdown in net equity capital investment in the United States and, to a much lesser extent, a shift from positive to negative reinvested earnings," Commerce said. .

—Jeff Bater contributed to this article.

Write to Brian Blackstone at brian.blackstone@dowjones.com"