Consumer Prices in U.S. Decline 1%, Most on Record

By Bob Willis

Nov. 19 (Bloomberg) -- The cost of living in the U.S. fell by the most on record as fuel costs plummeted and retailers used discounts for cars and clothing to entice consumers hobbled by job losses and sinking home values.

Consumer prices plunged 1 percent last month, more than forecast and the most since records began in 1947, after being unchanged the prior month, the Labor Department said in Washington. Excluding food and energy, so-called core prices unexpectedly fell for the first time since 1982.

Today's report signals deflation, or a prolonged slide in prices, may become another hazard facing Federal Reserve Chairman Ben S. Bernanke and President-elect Barack Obama. Deflation could worsen what some economists already call the deepest recession in decades, by making debts harder to pay off and countering the impact of Fed rate cuts.

``We are moving into an environment where prices are falling across the board,'' David Resler, chief economist at Nomura Securities International Inc. in New York, said in an interview with Bloomberg Television. ``That is going to continue. Deflation is spreading across the economy.''

Target Corp. is among retailers cutting prices in an effort to lure away cash-strapped holiday shoppers from Wal-Mart Stores Inc., the discount retailer that last week reported a gain in third-quarter profit.

A separate government report today showed housing starts fell 4.5 percent in October to an annual rate of 791,000, the lowest level since the Commerce Department began keeping the data in 1959.

Treasuries Gain

Treasuries, which rallied earlier in the day, remained higher after the reports. Yields on benchmark 10-year notes fell to 3.45 percent at 8:37 a.m. in New York, from 3.52 percent late yesterday.

Consumer prices were forecast to fall 0.8 percent, according to the median forecast of 77 economists in a Bloomberg News survey. Estimates ranged from a decline of 1.2 percent to a gain of 0.4 percent. Costs excluding food and energy were forecast to rise 0.1 percent, the survey showed.

Prices increased 3.7 percent in the 12 months to October, the smallest year-over-year gain since October 2007. They were forecast to climb 4 percent from a year earlier, according to the survey median.

The core rate increased 2.2 percent from October 2007, after a 2.5 percent year-over-year increase the prior month.

Energy expenses dropped 8.6 percent, the most since 1957. Gasoline prices fell 14 percent, the biggest decline in four decades.

Gas Prices

Gasoline has kept falling this month. A gallon of regular gasoline at the pump averaged $2.07 on Nov. 17, down from an October average of $3.08, according to AAA.

``We are seeing the fallout of global recession on inflation,'' said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. ``In commodity prices, it's leading to deflation.''

The consumer-price index is the last of three monthly price gauges from the Labor Department. The CPI is the broadest gauge because it includes goods and services.

A Labor report yesterday showed wholesale prices fell 2.8 percent last month, the most on record. Last week, the government also said the cost of imported goods declined by the most ever.

Food prices, which account for about a fifth of the CPI, increased 0.3 percent after a 0.6 percent increase in September.

The drop in core prices reflected declines in the cost of clothing, automobiles, air fares and hotel rates. New-vehicle prices fell 0.5 percent and clothing costs dropped 1 percent. The price of airfares plunged 4.8 percent, the most since June 1999.

First Since '82

The cost of all services, excluding fuel, was unchanged, the first time it hadn't increased since 1982.

The benefit of the drop in prices can be seen in its effect on incomes. Today's figures also showed wages increased 1.4 percent after adjusting for inflation, following no change in September. They were still down 0.9 percent over the last 12 months. The decline in purchasing power is contributing to the slowdown in consumer spending.

Retail sales fell 2.8 percent last month, the most on record, Commerce Department figures showed last week. Mounting job losses and record foreclosures are causing American consumers, who account for more than two-thirds of the economy, to retrench.

Wal-Mart, the world's largest retailer, said yesterday it planned to reduce U.S. prices on Thanksgiving food and Christmas merchandise to lure customers during the holidays.

Price `Rollbacks'

``You'll see a lot of rollbacks,'' Eduardo Castro-Wright, Wal-Mart's U.S. stores chief, told analysts at a Morgan Stanley conference in New York. Rollbacks refer to price reductions the retailer scatters throughout grocery, pharmacy and other departments to spur sales.

Target, the second-largest U.S. discounter, said this week it plans to add grocery items and offer ``sharper'' discounts to draw shoppers who are shunning jewelry, clothing and home goods, which account for more than 40 percent of its revenue.

``Right now, the consumer is very hesitant,'' Chief Executive Officer Gregg Steinhafel said during the company's Nov. 17 earnings call. ``They're very stressed.''

Sales of clothing and home goods have been ``sharply lower,'' partly because of banks decreasing consumer credit limits, Chief Financial Officer Douglas Scovanner said during the call.

Leaders in the U.S., Europe and Asia are calling for increased government spending to make up for the loss of consumer purchasing power and lessen the global recession.

Obama and House Democrats are planning to spend as much as half a trillion dollars to stimulate the world's biggest economy and U.K. Prime Minister Gordon Brown pressed other leaders of the Group of 20 nations to follow that effort last weekend.

To contact the report responsible for this story: Bob Willis in Washington at bwillis@bloomberg.net