Frugal consumers bring inflation to zero
WASHINGTON - Consumer prices have fallen more in the past year than in any 12-month period in nearly six decades - a huge break for shoppers but also a reminder that prices are being restrained by weak spending that is likely to slow an economic recovery.
The recession and lower energy costs kept a lid on prices last month, causing consumer inflation to fall to zero. Most economists think prices are now in a sweet spot: ultra-low inflation without a serious risk of deflation, a destabilizing spiral of falling prices and wages.
“Right now, there is no inflation out there,’’ said David Wyss, chief economist at Standard & Poor’s in New York. “The big issue is still a lack of economic growth.’’
Wall Street remained nervous that recession-battered consumers could short-circuit any economic rebound after the Reuters/University of Michigan index of consumer sentiment posted a significant drop for the first part of August. It was a much weaker showing than expected.
The Dow Jones industrial average lost about 76 points, and broader stock indexes fell too.
In yesterday’s report on consumer inflation, the Labor Department said prices were flat in July and have fallen 2.1 percent over the past 12 months - the steepest drop since a similar decline for the period ending in January 1950.
Core inflation, which excludes volatile energy and food prices, showed a small 0.1 percent rise in July and over the past 12 months has risen 1.5 percent - right in the Federal Reserve’s comfort zone.
The current decline reflects a 28.1 percent plunge in energy costs, which peaked at this time a year ago, when oil hit a record $147 per barrel and gas was more than $4 per gallon.
Since then, energy prices have tumbled. Other price pressures have disappeared, too, as the country struggled to cope with layoffs and the worst recession since World War II.
Gasoline prices, on a seasonally adjusted basis, fell 0.8 percent in July. The average price at the pump is $2.65 per gallon, up from $2.50 a month ago but well below the record high of $4.11 in July 2008.
Airfares rose 2.1 percent in July, while clothing costs jumped 0.6 percent - two rare examples of big price gains in the month.
The low prices could pinch retirees. Because inflation has hit zero, economists expect the country’s 50 million Social Security recipients will get no annual cost-of-living increase in their benefit checks next year.
That would be a marked change from this year, when benefits rose 5.8 percent, the biggest jump in more than a quarter-century.
The cost-of-living gain is figured by comparing the Consumer Price Index for the July-September period of one year with the same period in the next year. Last year’s cost-of-living adjustment reflected a big jump in energy costs.
“This year will be payback time,’’ said Mark Zandi, chief economist at Moody’s Economy.com.
The most recent increase, which amounted to an extra $63 a month for the typical retiree, helped bolster spending at the beginning of 2009, when the recession was most severe.
Some analysts said Congress might include a boost to Social Security in another stimulus package. But others said they doubted that would happen, given the huge budget deficits from the previous stimulus spending.
The Labor Department said prices were flat in July, after a 0.7 percent jump in June.
Food costs fell 0.3 percent, the sixth straight month they have dropped or been unchanged.