Wholesale inflation drops by record amount in October

Tuesday, November 14th 2006, 8:33 am
By: News On 6

WASHINGTON (AP) _ Inflation at the wholesale level plunged at a record pace in October, led by big declines in the price of gasoline and new cars.

Wholesale prices fell 1.6 percent last month, tying the record decline set in October 2001, the Labor Department reported Tuesday. It was the second consecutive big decrease, following a 1.3 percent fall in September.

Both months were heavily influenced by falling energy prices. But underlying inflation pressures were held at bay last month as well. Core inflation, which excludes energy and food, dropped by 0.9 percent, the biggest one-month fall in 13 years. That reflected big declines in prices for new cars and sport utility vehicles as dealers brought back sales incentives.

In other economic news, retail sales dropped by 0.2 percent in October, the second consecutive monthly decline following a 0.8 percent fall in September. Much of the weakness reflected falling gasoline prices, which pushed sales at service stations down by 0.6 percent in October.

Sales at auto dealers rose by 0.6 percent in October after a 0.7 percent September increase. But sales at department stores fell by 0.3 percent while sales at specialty clothing stores managed only a tiny 0.1 percent increase.

The overall economy slowed sharply in the spring and summer as consumers were battered by rising energy prices, higher interest rates and a cooling housing market.

Economists, however, believe that the recent significant declines in energy costs will lift consumer spirits and keep the economy from toppling into a recession.

The big retreat in core inflation was certain to be welcomed at the Federal Reserve, where policymakers are hoping that a string of 17 consecutive rate hikes will slow the economy enough to cause a decline in inflation pressures, which had risen above the Fed's comfort zone.

The central bank has left rates alone since August and analysts believe there will be no change when the Fed meets for the last time this year on Dec. 12.

The big 0.9 percent drop in core inflation was a welcome development following a 0.6 percent spike in September.

The big movements were attributed to car and truck prices, which drove core inflation higher in September and then acted to depress core inflation in October as dealers brought back sales incentives to move a huge backlog of unsold cars. Excluding new car prices, core inflation would have risen by a modest 0.1 percent in October.

Energy prices dropped by 5 percent last month following an even larger 8.4 percent fall in September. Gasoline prices, which had been surging for much of the year, have fallen by about 80 cents since rising above $3 per gallon in early August.

Gasoline prices were down 7.9 percent last month while natural gas, the most popular home heating source, fell by a record 9.3 percent.

Food costs were down 0.8 percent in October as the price of vegetables, pork, chickens and beef all declined.

Outside of food and energy, the 0.9 percent fall in core inflation was heavily influenced by the swing in auto prices. The category that includes sport utility vehicles fell by a record 9.7 percent while the price of passenger cars was down 2.3 percent.

Computer prices fell by 3.1 percent, the biggest drop since June.

The good news on wholesale inflation was expected to be seen in falling consumer prices as well. Analysts were predicting that prices at the retail level should drop by around 0.3 percent. The government will release that report on Thursday.