Consumers to Benefit as Wholesale Prices Drop
Wholesale prices, helped by sharp decreases for energy and new cars, plunged 1.6% last month in the biggest decline in more than a half-century of keeping records. Analysts said recession in the United States would keep the lid on inflation for many months to come.
The bigger-than-expected drop Friday in the Labor Department’s producer price index highlighted one of the few benefits a weakening economy can provide.
“The worsening downturn in industrial activity has spilled over into a general recession that is driving down prices,” said Jerry Jasinowski, president of the National Assn. of Manufacturers.
Economists said the report showed an absence of price pressures not only at factories, farms and other producers of finished goods but also at earlier stages in production, with costs dropping by 1.5% for intermediate goods and a steep 9.1% for crude goods.
“There’s absolutely no pressure in the pipeline,” said Oscar Gonzalez, an economist at John Hancock in Boston. “Producers have no pricing power at all. For consumers and the broader economy, that is good news.”
Analysts said consumers should find plenty of bargains as the holiday shopping season opens--and for months to come if demand slumps.
Even before the Sept. 11 terrorist attacks, the economy had endured a yearlong economic slowdown. But signs of weakness have grown dramatically since the attacks, with 415,000 Americans laid off in October alone, the biggest one-month drop in payroll employment in 21 years.
Though many analysts believe that the economy will begin to show signs of life by the spring, Michael Evans, chief economist at American Economics Group in Washington, said he was looking for the downturn to last through the first six months of next year, with economic growth declining this quarter and the next two at annual rates of about 2%. The economy turned negative with a 0.4% drop in activity in the July-September quarter.
Evans said he believes that the recession and a sluggish rebound would keep consumer prices rising by just 2% through next year and probably 2003. That would compare with a 3.4% increase in consumer prices last year.
Declining inflation pressures will give the Federal Reserve more room to cut interest rates to jump-start economic growth, analysts said. The Fed cut rates a 10th time Tuesday, and many economists predict an 11th rate cut at the Fed’s Dec. 11 meeting.
The 1.6% plunge in the PPI for October, four times what analysts had been expecting, was the largest drop since the government began tracking wholesale inflation in 1947. Prices had been up 0.4% in both August and September.
So far this year, prices at the wholesale level have been declining at an annual rate of 0.8%, a turnaround from the 3.6% increase last year.
The big drop in wholesale prices in October was led by a 7.7% plunge in energy prices, the biggest decrease in 12 years. Gasoline prices fell 21.2%, the biggest one-month drop in 15 years.
With many Americans cutting back on their travel plans after the terrorist attacks and the anthrax threats, the average price of a gallon of gasoline is $1.24--down by about 30 cents from a year ago--and has fallen below $1 in some parts of the country.
U.S. consumers felt better about their finances and the economy this month, according to a survey by the University of Michigan. The university’s consumer sentiment index rose to 83.5 in November, up from 82.7 in October, people with access to the study said. It was the second straight increase and the highest reading since 91.5 in August.
