US price fall a double-edged sword | Shanghai Daily

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August 17, 2009

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US price fall a double-edged sword

CONSUMER prices in the United States have fallen more in the past year than in any 12-month period in nearly six decades - a huge break for shoppers but also a reminder that prices are being restrained by weak spending that's likely to slow an economic recovery.

The recession and lower energy costs kept a lid on prices for last month, causing consumer inflation to fall to zero. Most economists think prices are now in a sweet spot: ultra-low inflation without a serious risk of deflation - a destabilizing spiral of falling prices and wages.

"Right now, there is no inflation out there," said David Wyss, chief economist at Standard & Poor's in New York. "The big issue is still a lack of economic growth."

Wall Street remained nervous last Friday that recession-battered consumers could short-circuit any economic rebound after the Reuters/University of Michigan index of consumer sentiment posted a significant drop for the first part of August. It was a much weaker showing than expected.

The Dow Jones industrial average lost about 76 points, and broader stock indexes fell, too.

In Friday's report on consumer inflation, the Labor Department said prices were flat last month and have fallen 2.1 percent over the past 12 months - the steepest drop since a similar decline for the period ending in January 1950.

Core inflation, which excludes volatile energy and food prices, showed a small 0.1 percent rise last month and over the past 12 months has risen 1.5 percent - right in the Federal Reserve's comfort zone.

The 12-month fall reflects a 28.1 percent drop in energy costs, which peaked at this time last year, when oil hit a record US$147 per barrel and gas rose above US$4 per gallon.

Since then, energy prices have tumbled. Other price pressures have disappeared, too, as the country has struggled to cope with waves of layoffs and the worst recession since World War II.

Gasoline prices, on a seasonally adjusted basis, fell 0.8 percent last month. The average price at the pump is currently US$2.65 per gallon, up from US$2.50 a month ago but well below the record high of US$4.11 per gallon hit in July 2008.

Airfares rose 2.1 percent last month, while clothing costs jumped 0.6 percent - two rare examples of big price gains in the month.

The low prices could pinch America's retirees. Because inflation has hit zero, economists expect the country's 50 million Social Security recipients will get no annual cost-of-living increase in their benefit checks in January next year.

That would be a marked change from this year, when benefits rose 5.8 percent, the biggest jump in more than a quarter-century.

The cost-of-living gain is figured by comparing the Consumer Price Index for the July-September period of one year to the same period in the next year. Last year's cost-of-living adjustment reflected a big jump in energy costs.

"This year will be payback time," said Mark Zandi, chief economist at Moody's Economy.com.




 

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