Free fall at the pump eases worries on living costs

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By Patrice Hill

Concern about high gasoline prices and the rising cost of living have melted away in recent weeks as a free fall in oil prices brought relief at the pump, dropping from more than $4 a gallon to well under $3.

The economic crisis of the past two months has ushered in an entirely new set of worries about jobs, disappearing wealth in the stock market and a prolonged recession, which now preoccupy both consumers and the Federal Reserve.

Alarm about the economy was so strong in recent consumer surveys that any elation over the retreat from high fuel prices failed to register.

Like consumers, top Fed officials were irritated much of the summer about a 25-year high in the inflation rate, which topped out at nearly 6 percent, and frequently stated their resolve to conquer it. But on Wednesday, Fed officials are expected to toss aside those concerns and order another broad cut in interest rates to try to save the economy from a deep recession.

The more than halving of oil prices, from more than $147 a barrel in early July to nearly $64 at the close of New York trading Friday, has a lot to do with the Fed's quick turnabout. Record-high food and energy costs earlier this year were driving forces behind the surge in inflation, but those price pressures have vanished.

Friday's oil-price plunge of nearly $4 a barrel, even after the Organization of Petroleum Exporting Countries cartel agreed to slash production, showed that the downward trend is firmly in place.

"The Fed clearly has no intent of worrying about inflation at a time when full stimulus is required to combat both a financial crisis and a severe recession," said Stephen Stanley, an economist as RBS Greenwich Capital.

He noted that consumer prices were flat last month, thanks to a large drop in energy costs that is likely to continue.

While grocery bills have remained stubbornly high, Mr. Stanley said, food costs are on the verge of plunging like oil prices in view of the steep drop in the prices for commodities like wheat, corn and soybean oil in futures markets since the summer.

After a "scare" this summer, inflation is now in full retreat, he said. Consumers and investors "will likely forget about inflation entirely for at least a year or so," and the Fed won't have to start worrying about it again until "late 2009, when the economy may finally start to return to health," he said.

Fed Chairman Ben S. Bernanke and other top Fed officials have indicated in recent statements that the central bank is now focused intently on nurturing the economy and battered financial markets back to health after a shattering episode since September.

The Fed and other central banks have slashed interest rates to try to revive growth, while waging an unprecedented campaign to pump trillions of dollars into the banking system and financial markets to try to thaw a severe freeze in credit that set in after Lehman Brothers' massive default and bankruptcy in mid-September.

Some pundits worry that the massive infusions of cash by the Fed - which so far have yielded only modest improvements in stricken credit markets like commercial paper and municipal bonds - will spur another round of inflation when the economy begins to recover. That could happen if all the money the Fed has flushed into the system finds its way into the hands of consumers who use it to once again bid up the prices of gas and other goods.

"Let's say that we are witnessing the two stages of a tsunami," said Jim Kunstler, an author and former journalist. "The current disappearance of wealth in the form of debts repudiated, bets welshed on, contracts canceled, and Lehman Brothers-style sob stories played out like the withdrawal of the sea.

"Then comes the second stage, the tidal wave itself - which in this case will be horrific monetary inflation," he said. "We can be sure the giant wave of money recklessly loaned into existence in just a few weeks' time will wash back through the global economy, leaving a swath of destruction."

Richard Berner, chief financial economist at Morgan Stanley, said such concerns about a resurgence of inflation are unfounded.

"We think those worries are vastly overblown," given the rapid decline of the economy, severe shortage of credit and collapse of oil and other commodity prices, he said.

"These developments are far from the dry kindling needed to reignite the fires of global inflation," he said. "In fact, we think the kindling is wet."

Not only is the main culprit - high oil prices - now no longer a threat, but recent strength in the dollar will make all imported goods and commodities less costly and contribute to lower inflation, he noted.