Consumer Inflation Drops, First Time in 28 Years

Cited: Reuters

If you take food and energy out of the equation, consumer inflation actually fell for first time in 28 years in January. In fact, that is the first time since 1982. This actually calms the rate hike worries that many people have been having lately.

The February 19 benign report on consumer inflation sent a positive signal to investors. It suggested the Fed will be able to keep short-term interest rates at record lows to strengthen the economic recovery without triggering inflation.

Some have worried that a Fed rate increase affecting consumers and businesses might be imminent, especially after it just raised the rate banks pay for emergency loans.

But the news of low inflation eased some concerns and helped lift stock prices. In midday trading, the Dow Jones industrial average rose about 29 points, or 0.3%. Broader stock averages also gained. Bond prices were little changed, but the dollar rose against other major currencies.

Overall consumer prices edged up 0.2% in January, the Labor Department said. But excluding volatile food and energy, prices fell 0.1%. That drop, the first monthly decline since December 1982, reflected falling prices for housing, new cars and airline fares.

The news was better than expected, especially after the government said February 18 that inflation at the wholesale level, excluding food and energy, rose 0.3% in January. That was faster than the 0.1% increase economists had predicted.

“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.”

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The 0.2% rise in overall prices reflected a 2.8% jump in energy costs. That’s the biggest one-month gain since August. Energy prices were driven by a 4.4% rise in gasoline pump prices and a 3.5% increase in the cost of natural gas. Food prices rose a moderate 0.2%, even though fruit and vegetable costs jumped 1.3%.

In raising the rate banks pay for emergency loans, the Fed said February 18 its action should not be seen as a sign that it would soon begin raising a key target for consumer and business loans. Still, global financial markets were roiled by the February 18 announcement.

Private economists said they believe that the Fed’s first increase in the more important federal funds rate will not occur until this fall at the earliest. That’s because they expect inflation to remain tame as the economy struggles to sustain the 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. Businesses don’t have the ability to raise prices.

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

However, some prices did drop, airline tickets down by 2.5%, new car prices down 0.5% and clothing costs dropped 0.1%.

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My Take: Wow, some prices did go down. Airline tickets and new cars went down in cost and those are two that I have nothing to do with. Closing it down, that is great for people with kids. What I would like to know is what other items went down in price. The lightbulbs go down in price?

Food always goes up in price, that’s a given! Now lightbulbs, like the grow lights, that most people use nowadays, is something for an indoor garden and should go down in price. The manufacturer would make their money in turnover. That’s the same with any business! If they lower their prices, they would make more in the turnover.

I’m not saying that prices for things like toy train sets should go down. Of course, parents would like that. There are many hobbyists that have whole areas set up around a model train, which means they would really like to prices to go down. They would also like to see their hobby tools go down in price, but that is a more specific item. We all have to just face the fact some prices will just not get any lower than they are.

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