Consumer prices drop record 1 percent in October

WASHINGTON – Consumer prices plunged by the largest amount in the past 61 years in October as gasoline pump prices dropped by a record amount.

The Labor Department said Wednesday that consumer prices fell by 1 percent last month, the biggest one-month decline on records that go back to February 1947. The drop was twice as large as the 0.5 percent decrease that analysts had been expecting and marked the third straight month that prices had either fallen or been unchanged.

The worry is that the recession, which many analysts believe will worsen in coming months, will further depress prices, hurting such industries as housing, autos and retailing, and contribute to a downward spiral that will feed on itself.

A separate report Wednesday showed that the woes in housing, where the economic troubles began two years ago, have yet to ease. Builders slashed construction of new homes and apartments to a seasonally adjusted annual rate of 791,000 units in October, the slowest building pace on records that go back nearly 50 years.

With the economy sliding into a recession and mortgage foreclosures continuing to rise to record levels, there was little prospect of a rebound any time soon. Analysts noted that the National Association of Home Builders reported this week that builder confidence plunged to a record low in November, reflecting the gloom that pervades the housing sector.

The big drop in inflation reflected not only a huge fall in gasoline and other energy costs, but widespread declines in other areas. Core consumer prices, which exclude food and energy, fell by 0.1 percent last month, the first drop in core prices in more than a quarter-century.

There were price declines for clothing, new and used cars, and airline fares. Analysts predicted further declines in the months ahead as retailers struggle to attract consumers who are being battered by rising unemployment and the weak economy.

The big retreat in consumer prices represented a remarkable turnaround from just a few months ago when a relentless surge in energy prices raised concerns that inflation could get out of control.

Since that time, the economy has been jolted by the most serious financial crisis in seven decades. The U.S. troubles have quickly spread overseas, depressing growth around the world and cutting into demand for oil and other products, a development that has resulted in sharp declines in the price of crude oil and other commodities.

"Consumer price inflation has suddenly screeched into reverse as the recent abrupt slowdown in world economic growth has led to sharp declines in energy costs while very weak domestic demand is putting downward pressure on retail prices," said Brian Bethune, chief U.S. financial economist at IHS Global Insight.

While falling prices especially for such key products as gasoline can provide a break for consumers, analysts said the worry is if price declines become so entrenched that consumers stop buying things, awaiting further price drops. That is one of the problems facing housing as buyers in some markets stay on the fence, expecting home prices to drop further.

The U.S. has not suffered through a prolonged bout of deflation since the Great Depression of the 1930s. But Japan was gripped with a period of deflation during the 1990s and it took a decade for that country to overcome those problems.

"I am worried that the situation in the United States could turn into a deflationary period in this country if trends continue," said Sung Won Sohn, chief economist at the Martin Smith School of Business at California State University. "With economic conditions getting worse and not better, the risk of deflation is there."

Other analysts, however, said they still saw deflation as a remote threat, in large part because they believed the Federal Reserve would use every means at its disposal to combat an actual period of deflation.

The Fed cut interest rates twice in half-point moves in October, driving the federal funds rate to 1 percent, a low seen only once before in the last half-century. Economists expect the Fed will cut rates again at its last meeting this year on Dec. 16.

The Bush administration has also been working to combat the current financial crisis, pushing out nearly $160 billion to banks from the $700 billion bailout fund Congress passed on Oct. 3.

Neel Kashkari, the Treasury official who is running the rescue effort, said Wednesday that he believed all the government efforts were having a significant impact.

"We believe the combined actions ... have stabilized the financial system and prevented a financial collapse," he said in remarks to a Washington business group.

For October, energy prices fell by a record 8.6 percent, led by a 14.2 percent drop in gasoline prices, also a record. Since prices at the pump have continued to fall this month, analysts are looking for a big decline in energy costs in November as well.

The nationwide average for regular gasoline now stands at $2.07, down 33 cents since the start of the month, according to the Energy Information Agency, and well below record-highs above $4 per gallon this summer.

Food costs rose 0.3 percent in October, just half the increase of September, as dairy products and fruit showed declines. Food prices are still 6.1 percent above where they were a year ago, reflecting big increases in past months as grocery stores hiked prices to reflect higher transportation costs.

Excluding food and energy, consumer prices fell by 0.1 percent, the first decline in core prices since a similar drop in December 1982 as the country was battling the effects of a severe recession. Many analysts believe the current downturn will be the worst recession since the 1981-82 slump.

The big drop in inflation meant workers got a bit of a break in their discretionary incomes. Average weekly earnings, after adjusting for inflation, were down by 0.9 percent from a year ago, but that was a smaller decline than the 2.5 percent drop for the 12-month period ending in September.