Bonzer Wolf™ (bonzerwolf) wrote,
Bonzer Wolf™

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Inflation vanishes for first time in my life

U.S. annual inflation vanished for the first time in over half a century, a government report showed, as the severe recession and sharp decline in energy prices since last summer led to a rapid reversal in price pressures.

Still, consumer prices advanced on a monthly basis in January for the first time in six months, easing fears somewhat that the U.S. might face a protracted stretch of falling prices known as deflation.

The consumer price index rose 0.3% in January on a seasonally adjusted basis, the Labor Department said Friday, slightly more than the 0.2% rise Wall Street economists in a Dow Jones Newswires survey had expected.

The CPI slid 0.8% in December. That number was revised from a 0.7% drop earlier this week when the government released annual adjustments to the CPI data.

The core CPI was up 0.2% last month, also slightly higher than expected.

Unrounded, the CPI rose 0.282% last month. The core CPI rose 0.177% unrounded.

Consumer prices were unchanged compared to one year ago, the lowest rate of change since August 1955 and well below the 2% annual rate of inflation that most Fed officials think is consistent with their dual mandate of price stability and maximum employment.

Core CPI was up 1.7% in the last year, however.

As long as price declines stay centered in energy and commodities, it's generally a plus for the economy since they free up more disposable income for households to spend. It's when those declines get embedded more broadly in inflation expectations and cause consumers and business already facing a severe recession to further delay spending and hiring that they become an economic headache known as deflation.

According to the Fed's January meeting minutes released Wednesday, many officials saw "some risk" of "excessively low inflation" while "a few even saw some risk of deflation."

Having already lowered official interest rates to near zero, Fed officials have two main options for combating deflation: quantitative easing through their myriad credit programs and communicating a more explicit inflation target.

The Fed's balance sheet has already doubled in the past five months to almost $2 trillion, and the Fed recently increased by five-fold the size of its Term Asset-Backed Securities Loan Facility, to as much as $1 trillion.

Meanwhile, in their January meeting minutes officials extended their inflation forecast horizon, which Fed watchers interpreted as a defacto target. The Fed's longer-term inflation forecasts - measured by the price index for personal consumption expenditures - are centered between 1.7% and 2%, though most officials think 2% is appropriate. If that catches on with markets and the public, it could keep inflation expectations from turning negative.

"Increased clarity about the (Fed's) views regarding longer-term inflation should help to better stabilize the public's inflation expectations, thus contributing to keeping actual inflation from rising too high or falling too low," Fed Chairman Ben Bernanke said Wednesday.

According to Friday's report, energy prices rose 1.7% in January compared to December yet plunged 20.4% over the last 12 months. Gasoline prices rose 6% last month. Food prices advanced 0.1%.

Transportation prices jumped 1.3% after three straight steep declines. Airline fares fell, but new vehicle prices increased 0.3%. Automobile prices were down on the year, however, reflecting the severe slump in sales.

Housing, which accounts for 40% of the CPI index, was unchanged. Rent increased 0.3, as did owners' equivalent rent. However, household fuels and utilities prices tumbled 0.7% while lodging away from home fell 1.1% as households cut back on non-essential spending.

Medical care prices increased 0.4%, while clothing prices rose 0.3%.

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, fell 0.1% in January. An increase in average hourly earnings was offset by the CPI rise, while hours worked were unchanged.

Tags: economy, recession

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