Deflation worries high with a record drop in the CPI

The Consumer Price Index, a key measure of how much Americans spend on groceries, clothing, entertainment and other goods and services, fell by 1 percent in October compared with prices in the previous month, the Labor Department reported Wednesday morning.

It was the steepest single-month drop in the 61-year history of the pricing survey and raised concerns about deflation as the economy contracts and demand for goods and services plunge. Another report released Wednesday indicated that new home construction continued to fall. “This month it’s more than slowing, it’s outright contraction,” said James O’Sullivan, United States economist at UBS. “And yes, if you extrapolate that, it’s deflation.”

Deflation, a continued decline in prices, could worsen the economic slowdown by making it harder to pay off debts and would negate the impact of interest-rate cuts by the Federal Reserve.

“The risk to the economy from pricing has rapidly moved from that of rapid inflation to the disinflation that is now moving through the system,” Joseph Brusuelas, chief economist of Merk Investments, wrote in a note.

Even excluding volatile food and energy prices, prices dropped 0.1 percent in October, the first such decline in more than two decades. Mr. O’Sullivan said that he expected core prices, which are up 2.2 percent this year to continue to fall back, but he does not expect them to slip into negative territory..

“You’re going to see huge declines in a month’s time in the November reports,” Mr. O’Sullivan said. “That’s the biggest part of the weakness.”

Energy prices led the decline in October, falling 8.6 percent as the price of gasoline continued its steady slide from highs of more than $4 a gallon. The costs of transportation fell 5.4 percent while clothing prices fell 1 percent.

“It’s funny that just a few months ago everyone was wringing their hands over inflation,” said Nariman Behravesh, chief economist at Global Insight. “It’s gone. It’s over.”

“The dominant and common factor is the plunge in gasoline prices, which drove the bulk of the weakness,” Mr. Sullivan said.

In a speech Wednesday at a Washington conference, the vice chairman of the Federal Reserve, Donald L. Kohn, said the risk of deflation remained slight but was increasing. “Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small,” Mr. Kohn said. The Fed, he added, needs to be aggressive, if necessary, to prevent a drop in prices.