News that the macro trend in prices turned down last month roiled the markets and sowed fears the American economy is on the brink of a Japan-like period of profit stagnation. Can anything more specific be divined from looking at the individual components of the consumer and producer price indices?

Certainly, falling oil and gasoline prices in the aftermath of war in Iraq were largely behind the dramatic drops in both indicators, which are released monthly by the Bureau of Labor Statistics. Both declines, 1.9% and 0.3%, respectively, for the month of April, followed rising prices in March and surprised economists, who were expecting much smaller dropoffs.

In April, the index for gasoline prices, which rose sharply in the first three months of 2003, decreased 8.3% after seasonal adjustments. The average price of gasoline sank from $1.79 to $1.70 per gallon. The energy price index fell 4.8%. While the housing price index, which includes fuel oil prices, declined by 0.1%, shelter costs, which includes rent and ownership costs, actually increased. Fuel oil prices plunged 14.9%. Still, they were 31.5% higher than in April 2002.

The volatility of energy prices are the result of a unique set of geopolitical circumstances that can be separated from the underlying health of the economy. In fact, many economists point to the core index, which excludes volatile food and energy items. The core PPI fell 0.9% in April, and the core CPI was unchaged.

Ken Goldstein, an economist at the Conference Board, pointed out that if the core PPI is adjusted to remove incentives for automobiles, the index actually rose by 0.2% in April.

However, the CPI is the most important gauge of inflationary conditions for the government. A closer look at the individual components of this index shows that, while price declines resulting from oil are almost solely responsible for the historic drop in the index, few sectors evinced any real pricing power.