Post by justjohn on Feb 21, 2010 6:08:07 GMT -7
Times Online
February 19, 2010
US consumer prices fall for first time in 27 years
Christine Seib in New York
Core consumer prices in the United States fell last month for the first time in 27 years, making an imminent rise in interest rates even less likely.
The Labor Department said that the Consumer Price Index (CPI), which measures the price of goods and services bought by households, rose by a seasonally adjusted 0.2 per cent in January
When food and energy, the most volatile categories, were stripped out, however, the index fell by 0.1 per cent as the cost of new cars, airfares and housing fell.
Declining rental costs were the driving factor behind the fall in core prices, as homes that could not be sold in the property slump were put up for rent, driving down the rental market.
It is the first time that so-called core prices have fallen since December 1982. The core price index is more closely watched by economists than the wider index.
Core prices rose 0.1 per cent in December and, with government stimulus money still pouring into the economy, economists had expected the same increase last month.
Core consumer prices have fallen just seven times since 1957, prompting Dan Greenhaus, an economist for Miller Tabak & Co, to describe the decline as “about as rare as a Bigfoot sighting".
Paul Ashworth, senior US economist for Capital Economics, said: “Over the 12 months to January, core inflation increased by a more normal 1.6 per cent, which is only slightly below the rate the Federal Reserve is targeting.
“Nevertheless, it is clear that even though the economy is expanding again, the threat of deflation has not passed."
The Fed takes into account the prospect of inflation when deciding whether to increase the federal funds rate from its longtime low of 0 to 0.25 per cent.
As the US economy has strengthened, there has been increasing speculation that the Fed would raise rates.
However, James Bullard, the president of the Federal Reserve Bank of St Louis, said yesterday that this speculation was “overblown” and that a rate rise remained “far away”.
The cost of Treasuries rose slightly this morning as investors took into account the lower likelihood of inflation as indicated by core prices.
Markets had been expected to fall today after the Fed said on Thursday afternoon that it would increase the discount rate — the rate at which banks borrow overnight from the central bank — from 0.5 per cent to 0.75 per cent.
Investors took that as a sign that a rise in the main funds raise might be closer than expected, despite the Fed's warning that its move on the discount rate was not indicative of wider changes.
The Dow Jones, NASDAQ and S&P 500 all fell by less than 1 per cent in early trading.
;D ;D