Consumer Prices Fall 0.3 Percent, as Expected

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Consumer prices fell by 0.3 percent in October, suggesting inflation is dormant in the weak economy, as energy costs posted their biggest decline in more than 15 years. The decline in consumer prices highlighted one of the few benefits a weakening economy can provide.

The latest reading of the Consumer Price Index, a key inflation measure, marked the best showing in three months and came after prices jumped by 0.4 percent in September, the Labor Department reported Friday.

Excluding energy and food prices, which can jump around a lot from month to month, the "core" rate of inflation rose by 0.2 percent in October, the fourth monthly increase of that size.

The data were fairly close to estimates from Wall Street economists who on average figured the overall CPI fell 0.2 in October while the core inched up 0.1 percent.

"It's still the same story, that there really is no inflation problem at this stage of the cycle,'' said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

Plenty of Holiday Bargains

Analysts say consumers should find plenty of bargains as the holiday shopping season opens — and for months to come if demand slumps.

Already, in an effort to get consumers into the stores now, many retailers across the country have sharply increased markdowns, making it likely that consumers will find the best holiday bargains in decades.

"The uncertainty and lack of unpredictability is putting everyone on edge,'' said John Morris, an analyst at Gerard Klauer Mattison, noting he was most surprised to see several department store chains including Macy's "discounting right out of the box.''

Markdowns on holiday goods are coming about three weeks earlier than in the past, analysts said.

"There's definitely more discounted holiday merchandise than a year ago,'' said Kurt Barnard, president of Barnard's Retail Trend Report. "Nobody is certain how the holiday season will unfold.''

With worsening unemployment — the jobless rate soared to 5.4 percent in October — and the threat of more terrorist attacks on U.S. soil, merchants face the prospect of a dismal holiday season. Many analysts believe that another attack in the midst of the critical holiday shopping season could further deter consumer spending.

Fed Has Leeway

Analysts say the lack of inflation is good news for the Federal Reserve, which will have leeway to cut interest rates again to jump-start economic growth. The Fed cut rates 10 times this year and some economists are predicting an 11th rate cut at the Fed's final meeting of this year on Dec. 11.

"If it's necessary to reduce rates, I don't see any constraints on the Fed at this point,'' San Francisco Fed President Robert Parry said on Thursday. "If further action is required, I am sure we have the capability to do that.''

The economy shrank at a 0.4 percent rate in the third quarter and many analysts are predicting a bigger decline in the current quarter, thus meeting a common definition of recession: two consecutive quarters of declining economic output. An economy in recession will put a lid on prices.

Good News for Gas Consumers

So far this year, consumer prices have risen at an annual rate of 2.1 percent, compared with a 3.4 percent advance for all of 2000. The moderation reflects sharply lower prices for energy products. Energy prices, which rose by double digits in 1999 and 2000, declined at a rate of 7.2 percent over the last 10 months.

The drop in consumer prices in October was led by a 6.3 percent decline in energy prices, the largest decrease since March 1986.

Natural gas prices, which had soared because of short supplies last winter, fell by a record 6.8 percent in October, the biggest drop since the government began tracking these prices in 1952.

Analysts are predicting that natural gas will be about one-third cheaper this winter than last, good news for the 55 percent of Americans who heat with natural gas.

Gasoline prices declined by 10.7 percent last month, the largest decrease since July.

With many Americans cutting back on their travel plans in the wake of the terrorist attacks and the anthrax threats, the average price of a gallon of gasoline is $1.18. That is down by about 34 cents from a year ago -- and has fallen below $1 in some parts of the country.

Oil prices plunged to their lowest level in more than two years on Thursday, which could further push down prices at the gas pump. December crude oil futures closed at $17.45 a barrel, the lowest level since June 1999.

Fuel oil prices fell by 5.2 percent in October, the largest drop since April 2000.

The drop in energy prices helped pushed down transportation costs in October, which fell by 2.2 percent. Airfares dropped by 2.5 percent, the biggest decline in a year. Auto prices edged up a tiny 0.1 percent.

Food prices, however, rose 0.5 percent, boosted by higher prices for poultry, fruits and dairy products.

Reuters and the Associated Press contributed to this report.