Friday’s release of the U.S. consumer price index for April added to the recent deflation worries dogging the U.S economy. Consumer prices fell by 0.3% during the month.

The annual CPI rate is down to 2.2% from 3.0% in March. This has economists talking of rate cuts once again in the U.S.

As with Thursday’s producer price index , energy was the big reason for the slide. Gas prices dropped 4.6% in the month. “Excluding the volatile food and energy costs, the core CPI was flat in the month, resulting in the year-to-year rate falling more than expected to 1.5% from 1.7% in March and from 2.5% in April 2002,” say Bank on Montreal economists. “This was the lowest core rate of inflation since March 1966. The price weakness was broadly based, with even housing prices slipping in the month.”

BMO Nesbitt Burns notes that the 6-month annualized inflation rate plunged below 1% at 0.9%. “This rate was 2% just six months ago!” Nesbitt marvels. And, it notes, “Figures below 1% are “too low” according to the Fed’s implicit tolerance range. The trajectory is sharply down and the Fed may feel the need for action now to prevent momentum from carrying core inflation toward zero.”

“The low inflation story was clear across the board and, taking the Fed at their word, keeps an easing in June very much in play,” Nesbitt says.

“We’ve been warning about U.S. deflation risks for the past half year, and now momentum in core prices has all but ground to a halt. If energy prices are at some point below year ago levels (as they will almost certainly be in the first quarter of 2004), the overall CPI would turn negative without an acceleration in core inflation,” says CIBC World Markets.

“The weakening U.S.dollar will help fight off that risk, but until that has time to work its way through, the risks of deflation will be very much alive. Greenspan promised to keep an eye on those risks, and by June, that will mean more than just talk but action to bring overnight rates lower and validate the move in the rest of the yield curve,” it adds.

TD Bank economists are most aggressive, saying that it expects the Fed to bite the bullet and cut rates 50 basis points to an all-time low of 0.75%.

BMO is more sanguine. It says, “Today’s weaker-than-expected reports increase the risk of a Fed rate cut at the June 24/25 meeting. However, at the moment, we believe that signs of strengthening activity will keep the Fed on hold.”

Separately Friday, the University of Michigan reported its preliminary U.S. consumer sentiment index rose to 93.2 for May, from a final reading of 86.0 in April.

The current conditions index fell to 94.1 though in a preliminary reading for May, from a final 96.4 in April, while the consumer expectations index jumped to 92.7 in May from 79.3 in April.