WASHINGTON, May 16: Underlying US inflation plunged to a 37-year low in April, data showed on Friday, ramping up deflation fears in the stubbornly sluggish postwar economy.

Core consumer prices, which strip away volatile food and energy prices, rose just 1.5 per cent when compared to April 2002 — the smallest annual increase since March 1966. They were flat when compared to March.

“The US economy continues to disinflate. We are one step closer to deflation,” BMO Financial Group economist Sal Guatieri warned.

Overall, sliding energy costs meant consumer prices fell by an 18-month record 0.3 per cent in April from the previous month, leading to 2.2-per cent inflation rate over the year.

The Federal Reserve raised the deflation spectre this month, warning bluntly that the risk of downward pressure on prices, though small, was now was greater than the risk of inflation.

Deflation, or falling prices, deals a double blow to economies by pressuring people to postpone buying until prices fall further and by raising real interest rates.

It is also very difficult to reverse.

The slumping US dollar, which skidded to a four-year low against the euro in the past week, may yet ride to the rescue.

“Certainly the marked depreciation of the dollar in the past year will help to raise import prices and perhaps stem the downward trend in deflation,” Guatieri said.

“But the real trend here is that we have got to see much stronger economic growth, because what is pushing down inflation is the slack in the economy,” he cautioned.

US industry operated at just 74.4 per cent of total capacity in April, the lowest level in 20 years, the Federal Reserve said in a report the previous day.—AFP