When prices fall for clothes, gasoline and other goods and services, it's good news for consumers who are facing increasing financial pressure in an ailing economy.
Consumer prices fell by 1 percent last month compared with September, mostly because of plunging energy prices, according to federal data released yesterday. It was the largest single-month drop in the 61-year history of the consumer price index, highlighting the cost cuts that retailers and others are making in hopes of calming jittery shoppers.
But some see the price declines as the latest troubling sign for the economy.
While costs for most things, including energy and food, are higher than they were a year ago, some economists are worried that continued price declines would worsen the slowdown by pressuring businesses to cut even more because of weak demand. Still, most analysts cautioned that the United States has not seen a prolonged period of deflation since the Depression.
"It's one more sign of everything else we've been seeing, in that asset deflation, such as falling home prices, is spreading into the goods and services economy," said Charles W. McMillion, chief economist of MBG Information Services in Washington.
"It's unlikely we'll have an overall deflation for an extended period of time. [But] if you're in the retail business, deflation is here. If you're in the real estate business, deflation is here. If you have a car dealership, deflation is here. It depends on where you sit," McMillion said.
Separately, the Federal Reserve lowered yesterday its forecast for economic activity this year and next because of the financial crisis. And a new report by the Commerce Department showed that new home construction dipped 4.5 percent in October to 791,000 units, the lowest level in nearly 50 years.
Such dismal economic indicators and increasing worries about the auto industry caused the Dow Jones industrial average to fall yesterday below the 8,000 mark, a level not seen since 2003. The Dow fell nearly 430 points, or 5 percent, to 7,997. Other major indexes declined at least 6 percent.
Excluding fluctuating energy and food costs, prices fell 0.1 percent last month, the first monthly decline in core prices in 26 years, according to the Labor Department.
"When the economy is strong, inflation is higher," said Richard Clinch, director of economic development at the University of Baltimore's Jacob France Institute. "When the economy falls, prices grow less rapidly."
