Yesterday it was producer prices; today it’s consumer prices. The collective message is all the clearer: the risk of deflation is rising.
Consumer prices dropped 1% last month–a huge decline for a single month and the biggest on record, based on historical data on the Labor Department’s web site going back to 1947.
Core inflation, which excludes food and energy, dipped by 0.1% in October, suggesting that the falling prices depicted in headline inflation is more than just a function of slumping commodity prices. And since the Fed focuses on core readings of inflation, last month’s dip in core CPI reminds that the central bank is losing control of the pricing environment. Indeed, the last time core CPI dropped on a monthly seasonally adjusted basis was in July 1980, which proved to be a one-time event.
It’s not clear that the negative signs in CPI this time are set for a quick fade. The perfect storm of recession, rising unemployment, a consumer population burdened with historically high levels of debt, the implosion of Wall Street, a housing crisis and a weakening global economy threaten to inject the poison of deflation into the U.S. economy.