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Oil Drives Consumer Prices to a Six Year Low

Posted by Joseph Trevisani on Dec 17, 2014 10:45:00 AM

Consumer prices declined in November at the fastest rate since December 2008 when the U.S. economy was in recession and prices were recovering from their financial crisis induced collapse. 

The consumer price index, which gauges retail costs throughout the economy, measuring everything from the price of cattle feed in Oklahoma to a latte in New York fell 0.3 percent last month from October according to the Labor Department today.

Prices on the year were 1.3 percent ahead, the slowest rise since January. Economists in the Bloomberg survey had forecast a 0.1 percent drop on the month and a 1.4 percent increase for the year. 

The core price index, excluding food and energy expenses rose 0.1 percent in November as predicted and the annual rate was 1.7 percent down 0.1 percent from October and  the 1.8 percent forecast.  

Crude oil prices have fallen almost 50 percent since the summer as rising production, primarily in the United States, declining consumption from a global economic slowdown and the decisions of oil producing nations to maintain production levels in pursuit of market share have crippled prices. The full impact of the price decline has not yet spread into the wider economy beyond energy and fuel costs.

Gasoline prices were off 6.6 percent month to month and seasonally adjusted in November and 10.5 percent on the year. 

Oil is the basic industrial commodity and energy costs are a substantial component of any manufacturing process. The longer oil prices remain low the greater will be the ability and the temptation for companies to cut prices to increase competitiveness or gain market share. Pressures on consumer pirces are likely to increase in the months ahead.

Even though the labor market has produced a steady stream of jobs this year, there has been minimal impact on wages. The long term slack in the labor market, typified by the near historic low labor force participation rate, will likely keep wages from accelerating, notwithstanding last month’s 0.4 percent increase in average hourly earnings. 

The last time the CPI rate was at the Federal Reserve's 2 percent target was in February 2013 and the last time the annual core PCE rate, the Fed's chosen inflation measure, was at the target was April 2012.

In October the core PCE was 1.6 percent where it is expected to remain in November. The overall PCE measure, including food and energy costs, was 1.4 percent in October, just 0.1 percent from the CPI rate of 1.3 percent.

Falling gasoline prices, though a boon to consumer spending, permitting households to shift purchases from the relatively inelastic demand of gasoline and fuel oil to discretionary sectors, and just in time for the holidays, do not increase the overall level of income in the economy. Only rising wages provide a true increase in disposable cash.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg


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