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Consumer Prices Fall Fastest Rate on Record, Raising Deflation Concerns

By Mike Caggeso
Associate Editor
Money Morning

Consumer prices dropped at the fastest rate in its 61 years of record keeping, the Labor Department reported in its October Consumer Price report.

Its closely watched Consumer Price Index (CPI) dropped 1% in October, higher than the 0.8% decline forecast.

The overall drop was heavily weighted by declining prices of energy (-8.6%), transportation (-5.3%), and clothing (-1.0%).

Prices for everything else – food and beverages, medical care, recreation, housing, education and communication – gained slightly or hovered in place.

Overall CPI has dropped 4.4% in the past three months. Consumer prices are 3.7% higher than they were a year ago, the smallest annual increase in a year.

If anything, the report offers shoppers a glint of good news as they turn over couch cushions for holiday shopping money. But if prices fall too much, the U.S. economy faces the problem of widespread deflation. 

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If deflation accelerates in our already fragile economy, it could push prices down so far that overall gross domestic product shrinks deeper into recession.

But one analyst believes deflation isn’t quite here yet.

“It appears we are in a period of disinflation right now, where the actual level of inflation is trending lower,” Michael Sheldon, chief market strategist for RDM Financial, told Reuters. “The question is will the economy rebound enough with the benefit of a big stimulus plan in 2009 to prevent deflation and get consumers spending again.”

Such a stimulus plan is likely in the Obama administration, aided by the strengthened Democratic positions in the House of Representatives and Senate.

Retail Price War

Under the gun of falling profits, Target Corp. (TGT) is launching a price war against its chief rival, Wal-Mart Stores Inc. (WMT), by cutting prices on clothing, food and electronics and moving such merchandise to the front of the store, The St. Paul Pioneer Press reported.

For its fiscal third-quarter ended Nov. 1, Target’s profit plunged 24%. Meanwhile, Wal-Mart beat estimates by reporting a 9.8% gain in third-quarter profit. The world’s largest retailer also said it is “optimistic” about holiday shopping season.

Also in retail news, BJ’s Wholesale Club, Inc. (BJ) the third largest warehouse club retailer in the U.S., beat its raised guidance and raised its full-year growth estimates to $2.20 to $2.30 earnings per share from its prior range of $2.10 to $2.20 EPS, 24/7 Wall Street reported.

News and Related Story Links:

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Deflation Risks Subsiding...Goldilocks Has Been Achieved (Blogging the Commodity Bull Market, 5/15/09)
CPI At Breakfast: Coffee Talk (Hard Assets Investor, 5/15/09)
The Erosion of Trust – CPI and GDP Distorted for Political Purposes (Trends I'm Watching, 4/11/09)
The Case for Continued Deflation (George Washington's Blog, 6/5/09)
Read more on Consumer Price Index - CPI (CPIS), Deflation at Wikinvest
November 19th, 2008

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