Tuesday December 16, 08:39 PM
Record plunge in US consumer prices stokes deflation jitters
By Veronica Smith
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WASHINGTON (AFP) - Plunging energy prices pushed US consumer prices down a record 1.7 percent in November as recession deepened and deflation fears intensified, government data showed Tuesday.
It was the second straight month of record declines in the seasonally adjusted data consumer price index (CPI (NYSE: CPY - news) ) since 1947, when the Labor Department began recording the figures.
The November headline plunge in CPI far exceeded analysts' consensus forecast of a drop of 1.3 percent.
Core CPI, excluding energy and food prices, held unchanged from October.
The accelerating decline in prices stoked fresh concerns about deflation -- the pernicious downward spiral of falling prices and weakening growth that is difficult to counter.
"As energy prices have plummeted in recent months and core inflation has diminished, inflationary pressures have rapidly given way to deflationary concerns," said Peter Kretzmer, senior economist at Bank of America (NYSE: IKJ - news) .
The data came hours ahead of a dramatic interest rate cut by the Federal Reserve aimed at stimulating growth as the world's biggest economy sinks deeper into a year-old recession.
The Federal Open Market Committee (FOMC) slashed the central bank's key target lending rate, already at a historic 1.0 percent low, to a record low range between zero and 0.25 percent, saying "the outlook for economic activity has weakened further."
"Meanwhile, inflationary pressures have diminished appreciably," the FOMC said, adding that it "expects inflation to moderate further in coming quarters."
According to the Labor Department, the year-over-year inflation rate plunged to 1.1 percent from 3.7 percent a month earlier and the 12-month core inflation rate eased to 2.0 percent from 2.2 percent.
The department noted that the headline number was down from July's 5.6 percent pace, when crude oil prices hit record highs above 147 dollars a barrel.
"Falling energy prices, particularly gasoline, drove the decline in the overall index. Excluding energy, the index was virtually unchanged," the department said.
The energy index fell 17.0 percent in November, roughly twice the October decline. Energy prices are now 32.4 percent below the July peak earlier this year, it said.
On a 12-month basis, energy prices were down 13.3 percent, compared with an 11.5 percent increase in October.
"The acceleration in the disinflationary trend suggests that inflation could turn negative -- for a short time -- before the summer '09 due to base effects," said Amine Tazi of Natixis (Paris: FR0000120685 - news) .
President George W. Bush's administration looked on the bright side of falling prices. Seeing them as deflation is "one way to look at it," said White House spokeswoman Dana Perino.
"But another way to look at it would be that lower prices are actually good for American consumers (ANCS.PK - news) because that means that you have more money in your pocket in order to spend it on other things."
The fall in energy prices acted "like a huge tax cut," she said, giving consumers more money to drive the spending that accounts for two-thirds of growth in the world's biggest economy.
November's sharp drop in energy prices was underscored by a record 29.5 percent decline in the gasoline index, which is now 47.0 percent below its July peak.
That led transportation prices to a second straight month of record declines, to a 9.8 percent drop from 5.4 percent in October.
The natural gas index declined for the fourth month in a row and was down 21.7 percent from July to November.
Before the October decline, the prior record was a 0.9 percent decline in July 1949.
Food prices declined 0.2 percent in November, after a 0.3 percent drop the prior month. On a 12-month basis, food prices were up 6.5 percent.
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