Consumer prices fall record 1%, inflation drops to 3.7%

Consumer prices declined in October by a record level, the Labor Department reported Wednesday. The Consumer Price Index (CPI), which is the most watched government inflation barometer, retreated to 3.7% during the previous twelve months and follows a decline of 4.7% in September.

On a monthly basis, the index fell 1% to mark the largest one month decrease since publication of seasonally adjusted changes began in February 1947. Economists were expecting a 0.9% decline.

"We are moving into an environment where prices are falling across the board," David Resler, chief economist at Nomura Securities International Inc. in New York, said in an interview with Bloomberg Television. "That is going to continue. Deflation is spreading across the economy."

Diving energy prices combined with a slowing economy has greatly changed the inflation landscape. Inflation began a depressing upward trend in 2008, peaking to a 17-year high of 5.6 percent in July when oil oil reached a record near $147 per barrel. While inflation was a serious worry in the summer, deflation is now more of the concern. Should prices continue to decline for months on end, companies could be forced to cut products, services and payrolls.

Consumer price figures for October

The “core” CPI, which excludes volatile food and energy prices, eased to 0.1%. Forecasts were for a 0.1% rise after September’s 0.1% jump. The 12-month rate is now at 2.2%, which is still slightly higher than the Federal Reserve’s 1%-2% comfort zone.

The report on Wednesday had some good news for consumers.

  • New vehicle prices declined 0.5% while used prices declined 2.4%.
  • Energy prices plunged 8.6%, the most since 1957
  • Gasoline prices tumbled 14.2%, although prices prices remain 12.0% above their October 2007 level
  • Airfares plunged 4.8%, the most since June 1999
  • Fuel oil dropped 11.8%
  • Natural gas declined 4.4%
  • Fruits and vegetables fell 2.2%

In contrast:

  • Medical care rose 0.2%
  • Meats, poultry, fish and eggs rose 0.6%
  • Food and beverage prices increased 0.3%
  • Electricity gained 1.7%

Housing prices, which accounts for 40% of the CPI index, remained virtually unchanged after falling 0.1% in September and August, the first back-to-back decline since 2001.

A separate Labor Department report on Tuesday showed producer prices dropped by a record 2.8% in October as energy costs continued to decline. 

With consumer and producer prices marking record declines and little signs of rising energy costs, inflation concerns have faded for the Federal Reserve. The door may be opened for a cut in interest rates. The Fed cut its benchmark interest rate by a half-percentage point on October 8 and again on October 29 in response to deterioration in the global economy.

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