Cheaper fuel helps warm consumers

CPI drops 0.3%, but without energy factor it actually rose

Industrial output off again

Savings on gasoline, natural gas viewed as a kind of tax cut

November 17, 2001|By William Patalon III | William Patalon III,SUN STAFF

A record drop in fuel prices pushed consumer prices down 0.3 percent in October, a revelation that further vindicates the central bank's drastic reduction of short-term interest rates to revive a badly flagging economy, experts said yesterday.

"This shows that the Federal Reserve was right for doing what it's done [with interest rates]," said David Citron, a money manager with the local office of Carret & Co. "They saw this coming; this proves their strategy was right."

Separately, another government report said that industrial production plunged for the 13th month in a row in October, the longest decline in output by U.S. factories, power plants and mines since the Great Depression.

In the first report, the Labor Department yesterday said the Consumer Price Index - the broadest measure of what consumers pay for products and services and a key inflation gauge - made its best showing in three months. The drop in October followed a 0.4 percent increase in September.

The drop in overall prices - due chiefly to huge declines in natural gas, crude oil and gasoline - is one of the few benefits of recessionary economic conditions. Prices fall on such goods as gasoline, giving consumers the ability to spend more on other things.

Falling prices "are like a tax cut for consumers," said Alan Levenson, chief economist for T. Rowe Price Associates Inc. in Baltimore.

The so-called "core" CPI, which excludes volatile food and energy prices, rose 0.2 percent in October, the fourth straight monthly increase of that magnitude.

So far this year, consumer prices have risen at an annual rate of 2.1 percent, well below a 3.4 percent advance for all of last year. Most of the moderation is due to sharply lower prices for energy products, which had risen by double-digit rates in 1999 and 2000.

To date, energy prices have declined at a rate of 7.2 percent. That includes a 6.3 percent decline in October alone - the largest decrease since March 1986.

Natural gas, which soared in price due to shortages last winter, plunged a record 6.8 percent in October, the largest drop since the government started tracking such prices in 1952. Analysts are forecasting that natural gas will be roughly one-third cheaper this winter than last.

Gasoline, too, has gotten much cheaper: The average price of a gallon of gasoline has fallen to $1.18, a decline of about 34 cents from the year-earlier period.

Gasoline prices could be headed even lower. Crude oil prices hit their lowest price point in more than two years Thursday. December crude oil "futures" closed at $17.45 a barrel, the lowest level since June 1999.

Oil-producing countries are bickering about production levels, with officials from the Organization of the Petroleum Exporting Counties criticizing Russia for allegedly pumping up production.

Overall, "inflation really isn't on the radar screen because of the big impact of the global slowdown," said Tim McGee, chief economist at Tokai Bank Ltd. in New York.

With inflation apparently contained, economists and analysts say the Fed clearly had the room to cut short-term interest rates 10 times this year, moves that took the benchmark federal funds rate down to 2 percent - a 40-year low.

In fact, if central bankers see the need, analysts say there's room for another rate cut on Dec. 11, when Fed policy-makers have their final meeting of the year.

Those rate reductions have slashed borrowing costs for businesses and consumers alike - so much so that further cuts in interest rates may not even be needed.

But with the all-important holiday shopping season the focus of so much worry, many economists believe the central bank will strike again, if only to give consumers comfort that the Fed remains on the job.

"I think the move is psychologically needed; we're still in a bad state," said Bill Cheney, chief economist of John Hancock Financial Services Inc.

After a record-length boom, the American economy declined by 0.4 percent in the third quarter, the first contraction since a 0.1 percent dip in the first quarter of 1993. Economists expect a drop in output in the current quarter, too, creating the two straight quarters of decline that meet the official definition of recession.

The U.S. manufacturing sector continues to be particularly sickly. The Fed said yesterday that industrial output skidded by 1.1 percent in October, adding to an already large 1 percent drop the month before. The 13-month drop in factory activity is the longest string of such declines since the 15-month stretch that ended in July 1932, in the depth of the Great Depression.

Economic reports that are released between now and the end of the year are expected to only get worse. But the combination of the Fed rate cuts and an expected federal infusion of as much as $100 billion should rejuvenate the economy by next year's second quarter, economists said.

Bloomberg News and Reuters contributed to this article.

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