- The Washington Times - Saturday, September 13, 2008

Businesses began reaping the rewards of falling energy prices last month as wholesale prices plunged 0.9 percent — the steepest one-month descent in nearly two years, the Labor Department reported Friday.

On the heels of steadily declining gas prices at the pump, which have fallen from a peak of $4.11 per gallon in July to $3.68 Friday, consumer sentiment jumped in early September to its best reading since January.

Consumers aren’t quite ready to resume spending with abandon, however.

Retail purchases unexpectedly declined 0.3 percent in August following a revised 0.5 percent decrease in July — raising prospects that the U.S. economy will be in recession as voters head to the polls in November.

The Commerce Department’s retail sales report was especially disappointing to economists, who had expected sales to rise 0.3 percent following an initial 0.1 percent decline in July. The effects of falling home prices, plunging stock markets, rising unemployment and wages that have failed to keep pace with inflation now appear to be taking a larger toll on consumers.

Not counting inflation, retail sales last month were only 1.6 percent above their year-ago level. Meanwhile, consumer price inflation was charging ahead at 5.6 percent during the 12 months ending in July.

“The positive benefits of the fiscal stimulus rebates faded quickly into the sunset,” said Brian Bethune, chief U.S. financial economist at Global Insight. “Without the props from the fiscal stimulus rebates, consumer spending is slowly caving in.”

Global Insight projects that real consumer spending — adjusted for inflation — will fall 1.1 percent during the third quarter and continue to decline during the fourth. Real consumer spending, which remained positive throughout the eight-month recession in 2001, has not fallen since 1991.

Should consumer spending decline for two consecutive quarters, the chance of recession would increase significantly.

The 0.9 percent plunge in wholesale prices last month indicates that inflationary pressures are subsiding. After jumping 0.7 percent in July, the “core” rate of wholesale price inflation, which excludes the volatile food and energy sectors and is a proxy for inflationary pressures, increased a relatively modest 0.2 percent last month.

Falling gasoline prices have not only made consumers less pessimistic about the future, they have also lowered expectations about inflation over the next 12 months. Inflation expectations dropped from 4.8 percent last month to 3.6 percent in September.

This is welcome news at the Federal Reserve, which obsesses over keeping inflation expectations in check.

Once inflation expectations become embedded in the minds of consumers and business, it can be very costly to the economy for the Fed to ratchet those expectations down to acceptable levels, said Vincent Reinhart, a scholar at the American Enterprise Institute who completed a seven-year stint last year as director of the Federal Reserve Board’s Division of Monetary Affairs. The usual Fed medicine is higher interest rates.

The Fed’s interest rate-setting policy committee convenes Tuesday, the same day the Labor Department is expected to report some good news on consumer prices.

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