Inflation

The Bureau of Labor Statistics (BLS) released the November inflation figures this morning:

November saw a record fall with the CPI-U dropping 1.9% during the month largely due to the continuing rapid decline in energy prices. On top of October’s 1% fall this means that prices have been in a record decline for a while. This is quite a contrast to the early summer when rising oil prices were driving inflation up rapidly. Our concern then was not deflation, but the possibility that the Federal Reserve Board would be forced to raise interest rates to control inflation even as the economy nose dived.

This turn of events may be good news for consumers, but it is certainly bad news for retailers and producers. Declining prices puts additional pressure on profit margins. Not only are manufacturers selling fewer items, but they are earning less per item sold. So they are being squeezed in two directions at once. The damage to the auto industry is acute: the prices paid for new vehicles [mainly cars] dropped about 0.6% last month as makers scrambled to try to restore sales levels by offering cut prices.

For those keeping records, this decline in prices is the sharpest since 1932 when the economy was gripped by depression and deflation.

Continued figures like these will put the Federal Reserve Board under increased pressure to make more moves to prime the economy. Unfortunately there is little, if any, room left in traditional policy to accomplish that, so the Fed will be searching through its dustier shelves looking for novel and rarely used policy levers to pull.

More grist for the economic historian’s mill, and more pain for the rest of us.