Consumer prices fall record 1.7%, inflation drops to 1.1%

Inflation for consumer products plummeted again during November as prices were pushed down again by free-falling energy costs. Consumer prices declined by a record level for the second consecutive month, the Labor Department reported Tuesday. The annual inflation rate is at 1.1% compared to the 3.7% increase in October.

The Consumer Price Index (CPI), the closely watched inflation barometer, fell in November by a seasonally adjusted 1.7% after October’s record 1.0% decline. Economists had expected a sharp drop between 1.3%-1.4%, which would have been a record itself. The latest figure marks the biggest decline since the government started keeping monthly data in 1947.

"This is scary stuff,” Mike Schenk, an economist for Credit Union National Association was quoted on MarketWatch. "We are teetering on the brink of a massive downward spiral. Deflation is a threat."

"I think we’re in a deflationary spiral that will probably go on until sometime next year," Thomas di Galoma, head of U.S. Treasury trading at Jefferies & Co. in New York was quoted at Reuters. "I think it will probably go on through the majority of 2009."

Falling prices is generally good news for consumers, but only to a certain point. If prices head for deflationary levels that hit below the cost to produce goods for a sustainable period, further economic turmoil can ensue with production cuts, payroll reductions and deepening unemployment. Prices will need to continue falling for many months to reach concerning deflation levels, however, according to Anika Khan, economist at Wachovia.

"It’s a bit premature to say we’re in a period of deflation," said Khan on CNNMoney. "We’ve had two months of record declines, [and] deflation may be a far-off worry if that continues."

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 reached a record near $147 per barrel. While inflation was a serious worry in the summer, deflation is now becoming a commonly read economic buzz word.

Consumer price figures for November

The “core” CPI, which excludes volatile food and energy prices, was flat after a rise of 0.1% in October. Forecasts were for a 0.1% increase. The annual rate is now at 2.0%, which is on the upper end of the Federal Reserve’s 1%-2% comfort zone, but not above it as in months past.

The report on Tuesday had some good news for consumers.

  • New vehicles prices fell 0.6%, and has declined 2.9% since November 2007
  • Energy prices plunged 17%, and are now 32.4% below the July peak
  • Gasoline prices tumbled 29.5% compared to Octobers 14.2% decline. They are now 47.0 percent below the July peak.
  • Airfares plunged 4.0%, although they are still up 4.0% since November 2007
  • Fuel oil dropped 14.6%
  • Natural gas declined 5.2%
  • Meats, poultry, fish and eggs fell 0.7%, the first time since February

In contrast:

  • Medical care rose 0.2% for the second consecutive month, and was 2.7% higher than in November 2007
  • Food and beverage prices increased 0.2%
  • Clothing climbed 0.3% after declining 1% in October
  • Electricity gained 0.6% following October’s 1.7% rise

Housing prices, which accounts for 40% of the CPI index, fell 0.1% in November after being virtually unchanged in October.

In a separate report on Friday, producer prices dropped 2.2% in November as energy costs continued to decline, the Labor Department said.

With consumer and producer prices marking record declines and little signs of rising energy costs, inflation concerns have faded for the Federal Reserve. Almost everyone expects the Fed today will cut its benchmark overnight interest rate from 1% to 0.50%, marking the lowest level on records dating to July 1954.

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