Energy glut buries U.S. inflation
Drop in consumer price index gives Fed room to cut rates
Peter Morton -- Financial Post
WASHINGTON - Energy prices have fallen to their lowest level in 15 years, helping to drive U.S. consumer prices down last month and proving inflation is all but dead.
The consumer price index, a key measure of inflation, fell 0.3% in October after a 0.4% increase in September as gasoline prices fell 10.7% and natural gas prices ease by 6.4%, the U.S. Labor Department said yesterday.
Although core inflation without energy and food rose 0.2% in the month, economists said the dramatically lower energy costs should be a big boost for the economy. "Gasoline prices are set to decline further along with oil prices," said Gerald Cohen, a senior economist at Merrill Lynch & Co. in New York. "Lower energy prices will also be a stimulus to growth, saving consumers at least US$70-billion over the next year."
The drop in consumer prices also gives Alan Greenspan, the Federal Reserve chairman, more room to cut interest rates again when the Fed meets Dec. 11. So far this year, he has cut rates by 4.5 percentage points to 2% in a bid to buffer the sinking economy from a harder landing. "It's still the same story, that there is no inflation problem at this stage of the cycle," said Bill Cheney, chief economist at John Hancock Financial Services Inc. in Boston.
Air fares fell 2.5% during October as airlines offered discounts to try to fill seats. However, food prices rose 0.5% in the month while clothing and education costs rose 0.6% in the month. Medical care also rose 0.4%.
"These increases are surprising, given the level of discounting evident in these sectors," Mr. Cohen said.
Inflation at the wholesale level also fell 1.6% during the month, the largest decline since 1947 when record keeping began.
On the other hand, U.S. manufacturing -- which represents about 20% of total economic activity -- took its largest dive in 11 years and extended the longest string of monthly declines since the 1930s Depression, the Fed said.
Output among the country's factories, mines and utilities fell 1.1% in October, the largest decline since the recession in 1990 when it fell 1.3%. Output also fell 1% in September. "In the wake of Sept. 11, it could have been much worse, and we are a bit relieved," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. "Overall, this is a grim report, though it tells us little about the future and we think the upturn is not too far away."
David Greenlaw, chief economist at Morgan Stanley, said while the decline was worse than expected, the cumulative fall of 6.5% over the past 13 months falls short of the 1981-82 recession when there was a decline of 10.3%.
However, output is expected to decline through the first half of next year, "making this one of worst industrial recessions ever, even if the overall recession turns out to be relatively modest by historical standards."
Among the sectors with the largest declines were automobiles, which fell 4.2% as manufacturers offered zero interest loans to move inventories at a nearly record pace. Lumber production fell 4.2% while furniture fell 2.3%, both likely linked to the slowdown in new and used homes sales.
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