By Bob Willis
Dec. 16 (Bloomberg) -- The cost of living in the U.S. fell in November by the most on record as gasoline and other energy prices plunged.
Consumer prices dropped 1.7 percent last month, more than economists had forecast, a Labor Department report showed today in Washington. Excluding food and energy, so-called core prices were unchanged from a month earlier.
Costs of oil and other raw materials plummeted last month as a credit crisis intensified, forcing consumers to slash spending and prompting U.S. automakers to ask for a federal rescue package. Tumbling sales have retailers cutting prices, bolstering economists’ expectations the Federal Reserve later today will cut its target rate to the lowest level ever.
“The prospect of the longest recession in over 50 years and evidence that overall inflation is moderating should persuade the Fed to take all actions necessary to keep credit flowing and to mitigate the economic downturn,” Dana Saporta, an economist at Dresdner Kleinwort in New York, said before the report.
A separate government report today showed that builders broke ground on the fewest new homes since record-keeping began in 1959. Housing starts fell 18.9 percent in November to an annual rate of 625,000, the Commerce Department said.
Treasuries, Stocks
Treasuries, which had risen earlier in the day, remained higher after the reports. Benchmark 10-year note yields fell to 2.50 percent at 8:36 a.m. in New York, from 2.51 percent late yesterday. Futures contracts on the Standard & Poor’s 500 Stock Index advanced ahead of today’s Fed meeting, gaining 0.7 percent to 878.50.
Consumer prices were forecast to fall 1.3 percent, according to the median forecast of 71 economists in a Bloomberg News survey. Estimates ranged from a decline of 1.7 percent to a drop of 0.4 percent. Costs excluding food and energy were forecast to rise 0.1 percent, the survey showed.
The monthly drop in the CPI was the biggest since the Labor Department’s records began in 1947.
Prices increased 1.1 percent in the 12 months to November, after a year-over-year gain of 3.7 percent in October. They were forecast to climb 1.5 percent from a year earlier, according to the survey median.
The core rate gained 2 percent from November 2007, after a 2.1 percent year-over-year increase the prior month.
Energy Costs
Energy costs dropped 17 percent, the most since 1957, today’s report said. Gasoline prices plunged 29.5 percent, and fuel oil costs fell 14.6 percent. Natural gas prices declined 5.2 percent from a month earlier.
Oil prices have fallen further this month. Crude oil futures on the New York Mercantile Exchange fell as low as $40.50 in intraday trading on Dec. 5 after averaging $57.44 in November.
“We had a bubble in oil, the bubble has burst,” David Wyss, chief economist at Standard & Poor’s in New York, said in an interview with Bloomberg Television. “One thing recessions are really good at is bringing down inflation.”
The consumer-price index is the last of three monthly price gauges from the Labor Department. The CPI is the government’s broadest gauge of costs because it includes goods and services.
With inflation less of a concern, the Fed today is forecast to cut its overnight lending rate by half a percentage point to 0.5 percent, according to economists surveyed. The decision will be announced around 2:15 p.m. in Washington.
Wholesale Prices
Prices paid to U.S. producers fell for a fourth month in November, sliding 2.2 percent, the government said last week. Import costs last month decreased by the most on record due to falling energy prices, Labor figures showed last week.
Food prices, which account for about a fifth of the CPI, gained 0.2 percent after a 0.3 percent increase in October.
New-vehicle prices declined 0.6 percent in November and clothing costs increased 0.3 percent. The price of airfares fell 4 percent in November from a month earlier.
The cost of medical care gained 0.2 percent, while housing costs dropped 0.1 percent, the report showed.
Today’s figures also showed wages increased 2.3 percent after adjusting for inflation, following a rise of 1.6 percent in October.
The recession, already a year long, will continue to slow inflation. Consumer prices will probably rise just 0.7 percent in the 12 months ended in September 2009, the smallest year-over- year gain since 1962, according to economists surveyed last week by Bloomberg News.
Slide in Sales
Retail sales fell 1.8 percent in November, a fifth month of declines, the government said last week. Consumer spending will fall at a 4 percent annual pace in the current quarter, the most since 1980, and drop 1 percent for all of 2009, the economists forecast.
Retailers are cutting prices. Toys “R” Us Inc., the largest U.S. toy-store chain, is putting “very aggressive” promotions in place this holiday season to draw in shoppers.
“Value is very important in this economic situation and we’re determined to be aggressive throughout the holiday season in offering that value,” Chief Executive Officer Gerald Storch said last month in a telephone interview.
Weak spending, exacerbated by the worst credit crisis in seven decades, pushed car sales in November to their lowest level since 1982, underscoring calls for a government bailout for General Motors Corp. and Chrysler LLC.
“Sales are at depression levels,” Mike Jackson, chief executive officer at AutoNation Inc., the largest car dealer in the U.S., said in a Bloomberg Television interview from Fort Lauderdale, Florida, last week. “What’s needed is a restoration of credit” and a “stimulus package for the economy.”
To contact the report responsible for this story: Bob Willis in Washington at bwillis@bloomberg.net
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