Biggest Price Drop in Six Years Lifts US Consumers

18 Dec 2014 | Author: | No comments yet »

Are signals for a rate cut slowly turning green all over?.

The cost of living in the U.S. fell in November by the most in almost six years, depressed by falling energy prices that signal inflation will stay below the Federal Reserve’s goal well into 2015.Readers of Firstpost’s Business section will not be surprised to learn that inflation as measured by the Wholesale Prices Index (WPI) has hit zero in November 2014.

The consumer-price index dropped 0.3 percent, the most since December 2008, after being little changed the prior month, a Labor Department report showed today in Washington. In all, the consumer price index is still up this year, but the pace of inflation is minimal and has been decelerating during the years of economic recovery since 2011. We have to thank falling global oil prices and slowing manufacturing – and� Raghuram Rajan ’s high interest rate regime – for this development. That doesn’t mean prices are now poised to fall at grocery stores or hospitals, but it does give millions of consumers a welcome boost: Wages have been rising modestly while prices are generally quiescent.

This year looks set to end with the best real pay increases since 2009 – a year when prices were falling and 6 million more Americans were unemployed. “The plunge in prices at the pump is offering relief to lower and middle income households and mitigating the elevated level of food prices,” says Chris Christopher, director of consumer economics at the forecasting firm IHS Global Insight in Lexington, Mass., in an e-mailed analysis. With the Consumer Prices Index (CPI) for November already below 5 percent (it clocked in at 4.38 percent), the monetary policy target set for achievement in January 2016 (6 percent) has essentially been over-achieved more than a year in advance, thanks to good luck and some degree of good policy-making (more of the former). Persistently low inflation allows Fed policy makers, scheduled to end a two-day meeting today, to exercise patience in raising the benchmark interest rates that they’ve held near zero since 2008 to spur growth and trim unemployment. In November, the month-over-month price drops included 6.6 percent in gasoline prices, 3.5 percent for fuel oil, 1.2 percent for used cars and trucks, and 1.1 percent for apparel. Plunging fuel costs also will free up money that households can spend on other goods and services, bolstering the economic expansion. “There really aren’t any inflationary pressures, even outside of energy,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, who is among the most accurate CPI forecasters over the past two years, according to data compiled by Bloomberg. “Time is still on the Fed’s side.” Stock-index futures held earlier gains after the report.

The base effect (where the current year’s index is higher or lower depending on whether the index base of last year was higher or lower) will dissipate from December 2015. The changes in part reflect weakness in the global economy, as well as gushing supplies of oil as Saudi Arabia leads a price war designed to muscle higher-cost producers out of the marketplace.

As we noted yesterday, State Street’s PriceStats index, which tracks millions of online prices to create a real-time gauge of inflation, predicts further declines through mid-December. The November WPI hit zero based on negative growth (-0.98 percent) in primary articles, due mainly to the fall in fuel and power (-4.91 percent), with petrol leading the decline by -9.96 percent and diesel by -2.97 percent. For its part, the Federal Reserve often focuses on measures of core inflation, which exclude food and energy prices. (Many at the Fed focus on core inflation because of moments exactly like right now, when a plunge in commodity prices causes dramatic swings in overall price gauges.) Core inflation in the November CPI climbed 1.7% from a year earlier, according to today’s report. Even so, the recent price trends have countered worries in some quarters that the economy faces an inflation threat due to years of Federal Reserve policies rooted in “quantitative easing” (purchasing bonds) and ultra-low interest rates.

To be sure, the decline would have been sharper, with WPI possibly turning negative in November, if the government had not raised taxes on fuel to reduce its fiscal deficit. After the Labor Department’s inflation announcement Wednesday morning, the Fed was set to release a policy statement early in the afternoon, which is expected to keep the door open to a hike in short-term interest rates some time in 2015. The average cost of regular gasoline dropped to $2.51 a gallon on Dec. 16, the cheapest since 2009 and down from this year’s high of $3.70 reached in April, according to AAA, the biggest U.S. auto group.

In November, manufacturing inflation was still at 2.04 percent – which means that core inflation (which excludes food and fuel, including the food products part of manufacturing) is still positive. But in Russia, where the collapse in oil equals a collapse in a key source of government revenue, a crisis of confidence in the ruble currency is making imports much more expensive for consumers to buy.

The Fed’s preferred price gauge, linked to consumer spending, rose 1.4 percent in October compared with the same month last year and hasn’t been above the central bank’s 2 percent goal since March 2012. Fed officials weighing when to raise rates are likely to focus on a jobless rate that’s fast approaching their goal for full employment, even as declining oil prices hold inflation below their target, economists said. Policy makers, at their meeting yesterday and today, will look past low inflation and drop a pledge to keep interest rates near zero for a “considerable time” as the Fed seeks an exit from the loosest monetary policy in its 100-year history, analysts said. The Federal Open Market Committee will adopt a word such as “patient” to describe its approach to policy, according to 68 percent of economists surveyed by Bloomberg. That drew customers and helped companies including Costco Wholesale Corp., L Brands Inc. and Gap Inc. (GPS:US) to report November same-store sales that exceeded analysts’ estimates.

The gap, the broadest measure of international trade because it includes income payments and government transfers, increased 1.9 percent to $100.3 billion from a revised $98.4 billion in the second quarter, according to Commerce Department figures. That surge swamped a narrowing in the trade deficit and a larger surplus in primary income, which increased to $59 billion, the biggest since the last three months of 2011, from $54.8 billion.

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