Low Inflation Gives Fed Green Light to Cut Rates Again

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A decline in consumer prices in October suggests inflation is dormant in the weak economy and gives the Federal Reserve a green light to cut interest rates yet again at its next meeting on Dec. 11.

Lower prices, one of the few benefits a weakening economy can provide, will also prove beneficial for consumers gearing up for the holiday shopping season.

Consumer prices fell by 0.3 percent in October as energy costs posted their biggest decline in more than 15 years, the Labor Department said Friday.

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.

Fed Has Leeway 

Also on Friday, the Federal Reserve said output at the nation's factories, mines and utilities fell 1.1 percent in October, the biggest decrease since November 1990.

The latest decline, which followed a 1.0 percent drop in September, marked the 13th consecutive fall in output, the longest string of declines since the 15 months that ended in July 1932, when the nation was in the midst of the Great Depression.

Analysts said the reports hardly suggested that a turnaround in the hard-hit factory sector, and in the overall economy, was around the corner. Both are situations that give the Federal Reserve a green light to cut interest rates yet again.

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 ouput. An economy in recession will put a lid on prices.

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.

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.

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.

Some Promising Signs

Despite the general agreement that the United States is in the midst of a recession, market watchers see some signs that could indicate an economic recovery next year.

Positive economic signs that are starting to emerge include this past week's big jump in retail sales and better-than-expected earnings from Hewlett-Packard. The Commerce Department reported Wednesday that retail sales rose 7.1 percent in October, the biggest-ever monthly advance and a contrast to the 2.2 percent decline in September.

Tech bellwether HP on Wednesday beat earnings forecasts by 11 cents a share, and chief executive Carly Fiorina said the company managed inventory aggressively and lowered expenses to deal with the economic slowdown.

More visibly, Wall Street's rallies are carrying the Dow Jones industrials back toward the 10,000-point level. That milestone, a symbol of the stock market's accomplishments over the past decade, stands now as a goal in the recovery from the economic slump and the Sept. 11 terrorist attacks.

"The market's got some firm underpinnings at this point, with the geopolitical situation going well, and the stimulus that's been packed into the pipeline, which should really set us up for a good rebound in 2002,'' said Nat Paull, a portfolio manager at New Amsterdam Partners.

Reuters and the Associated Press contributed to this report.