Wholesale Inflation Falls at Record Rate

By Martin Crutsinger
Associated Press
Wednesday, November 15, 2006

Inflation at the wholesale level plunged at a record pace in October, led by big declines in gasoline and new cars, while retail sales slid for a second straight month.

Wholesale prices fell 1.6 percent in October, tying the record decline set in October 2001, the Labor Department reported yesterday. Underlying inflation, excluding energy and food, was also well behaved, falling by 0.9 percent, the biggest retreat in 13 years.

Meanwhile, retail sales dropped by 0.2 percent in October following an 0.8 percent fall in September. But much of the weakness in both months came from the big drop in energy prices, which depressed the dollar level of sales at gasoline stations.

Excluding the drop at gas stations, retail sales rose by 0.4 percent last month, as strength in auto sales offset weakness at department stores and hardware stores.

Analysts said they thought the strength in employment, with the jobless rate at a five-year low of 4.4 percent, meant that consumer spending in the holiday season would be supported by income growth and the fall in gas prices, which will give Americans more to spend on other items.

"Despite all the angst about a slowing economy, I don't think Santa will be laying off any reindeer," said Bill Cheney, chief economist at John Hancock Financial Services Inc. "The underlying trend in consumer spending still looks pretty healthy."

Consumer spending, which accounts for two-thirds of economic growth, slowed sharply in the spring as consumers were battered by soaring energy prices, rising interest rates and a cooling housing market.

The overall economy grew at an anemic rate of 2.6 percent in the spring and an even weaker 1.6 percent in the summer. But analysts said there should be a modest rebound in growth in the final three months of this year as falling gasoline prices give consumers a second wind.

After topping $3 per gallon in early August, gas prices have fallen by about 80 cents, leaving consumers with more cash in their pockets.

"We expect that lower energy prices and solid personal income growth will spark decent holiday sales," said Douglas Porter, senior economist at BMO Capital Markets.

Many analysts suggested that shoppers could be rewarded with bargains as nervous retailers slash prices to make sure they are not caught with a big overhang of unsold items.

For October, sales at auto dealers rose by 0.6 percent 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 0.1 percent increase.

The big retreat in core prices at the wholesale level was certain to be welcomed at the Federal Reserve, where policymakers are hoping a string of 17 consecutive rate hikes will have slowed the economy enough to cause a decline in inflation pressures.

The central bank has left rates alone since August and analysts have said they think there will be no change when the Fed meets on Dec. 12.

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