Consumer Prices ... Fall for First Time in 27 Years

[Shaun @ Tru6]

What does this mean in practical terms?

I've been getting re-orders as soon as I ship from some stores.

Consumer prices excluding food and energy fall - National Business - MiamiHerald.com

Consumer prices excluding food and energy fall

By MARTIN CRUTSINGER
AP Economics Writer

Consumer prices rose less than expected in January while prices excluding food and energy actually fell, something that hasn't happened in more than a quarter-century.

The Labor Department said Friday that consumer prices edged up 0.2 percent in January while prices excluding food and energy slipped 0.1 percent. That was the first monthly decline since December 1982.

The benign inflation news gives the Federal Reserve more time to keep interest rates at record-low levels to shore up the economy and should ease worries in financial markets that a Fed rate hike is more imminent.

The news on consumer prices was better than expected, especially after a government report Thursday showed that wholesale prices shot up 1.4 percent in January.

"After a few reports showing higher inflation trends, we saw proof today that they have yet to trickle down to the consumer level," said Jennifer Lee, senior economist at BMO Capital Markets. "What price pressures did exist all came from the volatile food and energy categories."

The 0.2 percent rise in overall prices reflected a 2.8 percent jump in energy costs, the biggest one-month gain since August. Energy prices were driven up by a 4.4 percent rise in gasoline pump prices and a 3.5 percent increase in the cost of natural gas.

Food prices rose a moderate 0.2 percent even though fruit and vegetable costs jumped by 1.3 percent.

The 0.1 percent fall in core inflation, which excludes energy and food, was the first monthly decrease in core inflation since a similar 0.1 percent fall in December 1982. This drop reflected falling prices for shelter, new cars and airline fares.

The decrease underscored the absence of inflation pressures at the moment and should help ease worries in financial markets about a likely Fed rate hike. Those concerns were triggered on Thursday when the Fed announced that it would increase its discount lending rate by a quarter-point to 0.75 percent. This is the rate it charges banks for emergency loans.

Although the Fed said the step should not be seen as a signal that it would soon begin raising a key target for consumer and business loans, global financial markets were roiled by the Thursday announcement.

Private economists, however, said they still believe that the Fed's first increase in the more important federal funds rate will not occur until this fall at the earliest because they expect inflation to remain tame as the country struggles to mount a sustained rebound from a deep recession.

High unemployment is keeping a lid on wage gains and consumer spending is being constrained by the weak income growth, which means businesses don't have the ability to boost the price of their goods.

The Consumer Price Index report for January did show some price increases in scattered areas. The price of medical care rose by 0.5 percent, the biggest one-month gain in two years, while the cost of tobacco products increased 0.4 percent, the biggest increase since November.

But the price of airline tickets dropped by 2.5 percent while new car prices fell 0.5 percent and clothing costs were down 0.1 percent.

[Racerbvd]

I've been getting re-orders as soon as I ship from some stores.

Congrats!!!!

[Rich76_911s]

I think the first thing most would say is don't put too much into one months data.

Also I would say the government has an interest (I'd say a VERY BIG interest) in keeping that number low, and they unquestionably have the ability to manipulate it.

Real world I would say this has little to no impact, because it really is calculated and manipulated in weird and funky ways. Several months of negative CPI numbers might start to mean somthing.

One quick, maybe too simple example would be this:
You average computer in January costs $250.
In February your average computer now has a DVD player but costs $400.

According to the government there could be NO inflation in the above example. The increase in price is simply due to technological change. It might even be possible for them to find the price change in that example to be deflationary. I'm just trying to show that it is not exactly a science how they come up with the CPI number, and that decisions can be made to have the desired outcome. Kinda like statistics.

[Crowbob]

I agree with Rich. One month does not a trend make. However, say it's the beginning of a trend, then there will be lots of practical impact. Of course, the degree of impact depends on how robust and long-lived the trend is before it becomes the norm, which it will. At some point food and energy prices reverse suddenly and begin to rise faster than inflation. Then: We're off to the races!

[jyl]

Watch to see if negative core CPI is a trend.

Also watch PPI versus CPI, if the latter is below the former, that is negative for corporate profits.

Negative inflation (deflation), if it is sustained, is negative for the economy. Also for the stock market, I posted on that in 2008 I think.
Note that liquidity (in the sense of money supply) has been contracting. Contrary to what the hyperinflation bears say.

Basically, you don't want to see negative core CPI. It is bearish.

[Porsche-O-Phile]

Pricing is down? Hahaha! I certainly don't see it. Its such a small amount and for such a short time (one month?) it's not even perceptible.

Besides, if prices do drop, it's just an excuse for energy companies to say "hey, people have more unspent money - time to raise prices and go git it!". As they say, gas expands to fill a vacuum.

This is a non-issue and just a result of so many people being out of work and the REAL economy still being stretched so thin. I still think the bigger specter looming out there is the one of hyperinflation. I really do. I know everyone wants the economy turned around but be careful what you wish for. If/when things really do earnestly start turning around (not just as a result of temporary stop-gap measures, but REALLY turning around), you're going to see inflation explode. EXPLODE. As in, will make the 1970s look tame. Double digits per year. Yes I really do think it's possible - even likely.

But we have to overcome the deflationary forces that are shrinking everything right now. That's going to take a while.

[Noah930]

So should I go with the two extra mortgage payments per year to shorten that 30-year fixed rate down by almost a third? Or should I have gone with the Wayne plan of interest-only for the next 15 years?

[DanielDudley]

Originally Posted by Noah930

So should I go with the two extra mortgage payments per year to shorten that 30-year fixed rate down by almost a third? Or should I have gone with the Wayne plan of interest-only for the next 15 years?

Interest only. Hmm, let me think about that. Let's see, I can cut my 30 year fixed with a couple of extra payments, or I can commit ritual suicide.

Let me get back to you on that.

[turbo6bar]

Originally Posted by Noah930

So should I go with the two extra mortgage payments per year to shorten that 30-year fixed rate down by almost a third? Or should I have gone with the Wayne plan of interest-only for the next 15 years?

No ideal plan exists. You have to consider your financial situation, goals, and needs.

My shotgun answer: pay down extra principal and do not refi. If things get tight or your needs change, you can always discontinue extra principal payments and revert back to comfortable payments. I applaud any effort to pay off debt quickly, but be careful to not over-commit.

[Rich76_911s]

Shaun and anyone interested:

Here is an intersting little piece on the deflationary pressures in our economy right now.

If you click on the Green areas you'll get an expanded amount of information.

Cheers
Rich

Bloomberg.com: TV and Radio

[Shaun @ Tru6]

Thanks Rich, I'm hoping to pick this discussion up next week. Samples coming in now.