Fears of deflation grow

WASHINGTON (AP) - December 12, 2008

The Producer Price Index, which tracks costs of goods before they reach consumers, fell 2.2 percent last month as prices for gasoline and other energy products retreated, the Labor Department reported Friday.

That followed a record 2.8 percent plunge in wholesale prices in October. Smaller price declined were logged in August and September.

November's price drop was larger than the 2 percent decline economists were forecasting.

Falling prices might sound like a gift at first - at least for buyers. But a prolonged, widespread decline would do serious economic damage, dragging down incomes, clobbering home prices even more and shrinking corporate profits.

The last time wholesale prices dropped for four straight months was from October 2001 through January 2002, when the economy was very weak. The country had suffered through a recession that began in March 2001 and ended in November of that year. After that, however, the economy was still struggling to get back to full throttle.

Stripping out energy and food prices, which can swing widely from month to month, the "core" rate of inflation nudged up 0.1 percent in November. That matched economists' expectations. Core inflation, which had gone up a brisk 0.4 percent in the prior three months, has calmed down considerably.

Just a few months ago, worries were running rampant about inflation getting out of control as energy prices soared to record highs and food and other commodity prices marched steadily upward.

Now with the U.S. economy in recession and other countries coping with their own economic slowdowns, demand has cooled for energy products and other things, forcing prices to retreat.

The turnaround underscores just how quickly economic conditions can change.

With the U.S. economy sinking deeper into recession, the Federal Reserve is widely expected to slice its key interest rate - now at 1 percent - by at least half a percentage point on Dec. 16.

Lower rates are aimed at enticing consumers and businesses to boost spending, which would spur economic activity. The bracing impact, however, of the Fed's rate reductions have been blunted somewhat by a severe credit crisis that has made banks clutch cash, rather than more freely lending money to customers. The credit clog has badly hurt the economy.

Cutting rates also is a way to fend off deflationary forces from taking hold.

In November, energy prices fell 11.2 percent, following an even bigger 12.8 percent drop in October. That reflected a record 25.7 percent plunge in gasoline prices, as well as sharp declines in the costs of home heating oil and liquefied petroleum gas, such as propane.

Food prices, meanwhile, were flat in November, after edging down 0.2 percent in October. Falling prices for pork and eggs helped to temper rising prices for beef and veal, and vegetables.

Elsewhere in the report, prices for passenger cars dropped 0.6 percent and prices for light trucks dipped 0.1 percent in November.

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