Consumer prices flat in September

Thursday October 16,2008

Consumer prices flat in September on lower gas, clothes costs, but paychecks keep shrinking

-- Consumer prices were flat in September as retreating costs for gasoline, clothes and new cars helped to offset rising prices for food, medical care and other things.

The new reading on the Consumer Price Index, the government's most closely watched inflation barometer, came after prices actually dipped by 0.1 percent in August, the Labor Department reported Thursday.Those two months, however, offered Americans a rare reprieve. Consumer prices have marched upward most of the year, spiking by 1.1 percent in June.

And that means paychecks aren't stretching as far, straining consumers. Recent readings on retail sales were grim. The prospects that consumers will retrench further would spell more trouble for the already ailing economy.

Other economic reports showed that filings for unemployment benefits remained elevated and big industry production plunged by the most since late 1974, largely reflecting fallout from hurricanes Gustav and Ike.

But on Wall Street, the Dow Jones industrials soared 401.35 points in another volatile session.

In the inflation report, when energy and food products are stripped out, "core" prices inched up by just 0.1 percent in September, an improvement from a 0.2 percent advance in August.

The latest showing on inflation was better than economists expected. They were forecasting a 0.1 percent increase in overall prices and a 0.2 percent rise minus energy and food.

Paychecks continued to shrink.

Weekly wages dropped by 2.5 percent in September compared to a year ago, the 12th straight period in which wages have been down.

So far this year, consumer prices have risen at an annualized pace of 4.5 percent, faster than the 4.1 percent increase for all of 2007. Core prices in the first nine months of this year have increased at a pace of 2.4 percent, matching the rise for all of last year.

The higher inflation seen for most of this year, however, does mean that Social Security paychecks will be fatter next year. Social Security benefits will go up 5.8 percent next year, the largest increase in more than a quarter century.

Another Labor Department report showed the number of new people signing up for unemployment benefits last week dropped. Even with the decline, new claims totaled 461,000 -- a figure associated with deep troubles in employment conditions.

Indeed, the four-week moving average of jobless claims is at a seven-year high. And, the number of people continuing to collect jobless benefits rose to 3.7 million, the highest since late June 2003, when the labor market was still struggling to get back on its feet after the 2001 recession.

Citigroup Inc., which reported its fourth straight quarterly loss Thursday, eliminated 11,000 jobs during the third quarter, bringing its job cuts for the year to 23,000 -- vivid testimony to the damage wrought by the financial crisis.

Vanishing jobs, dwindling nest eggs and shrinking paychecks are straining millions of ordinary Americans. Economic anxiety is the voters overarching concern as they get ready to head to the polls in a few weeks to select the country's next president.

Whether that's Democrat Barack Obama or Republican rival John McCain, the next leader will be confronted by a troubled economy.

A report from the Federal Reserve said that production at the nation's factories, mines and utilities plunged 2.8 percent last month, on top of a 1 percent drop in August.

The Fed estimated that disruptions related to the hurricanes accounted for about 2.25 percentage points of the total drop in industrial production in September. In addition, a strike affecting the commercial aircraft industry also was a factor in the poor showing, accounting for around a half percentage point of the overall decline, the Fed said.

Fed Chairman Ben Bernanke warned Wednesday that a quick rebound is not in the cards for the stumbling economy -- even if financial turmoil were to disappear.

With the economy in for a period of weakness that could extend well into next year, inflation should also moderate, Bernanke and other Fed officials predict. Tamer inflation would give the Fed more leeway to slice rates again or at least keep them at low levels for some time.

"The rapidly disappearing inflation threat is providing the Federal Reserve full latitude to move to an easing bias on rates to combat the recession as well as the ongoing financial crisis," said Brian Bethune, economist at Global Insight.

Many economists believe there's a strong chance the Fed will lower rates at its next regularly scheduled meeting later this month. In an unprecedented assault on the financial crisis, the Fed and other major central banks together reduced rates last week. The Fed's main rate dropped to 1.5 percent, from 2 percent.

Oil prices closed at a new 14-month low beneath $70 a barrel Thursday, suggesting gas prices will keep falling. Prices hit a record high of $147.27 a barrel in mid July.

The retreat in these and other commodity prices "as well as the likelihood that economic activity will fall short of potential for a time, should lead to rates of inflation more consistent with price stability," Bernanke said.