- The Washington Times - Tuesday, November 14, 2006

1:30 p.m.

Inflation at the wholesale level plunged at a record pace in October, led by big declines in the price of gasoline and new cars.

Wholesale prices fell 1.6 percent last month, tying the record decline set in October 2001, the Labor Department reported today. It was the second consecutive big decrease, following a 1.3 percent fall in September.

Both months were heavily influenced by falling energy prices, but underlying inflation pressures were held at bay last month as well. Core inflation, which excludes energy and food, dropped by 0.9 percent, the biggest one-month fall in 13 years. That reflected big declines in prices for new cars and sport utility vehicles as dealers brought back sales incentives.

In other economic news, retail sales dropped by 0.2 percent in October, the second consecutive monthly decline following a 0.8 percent fall in September. Much of the weakness reflected falling gasoline prices, which pushed sales at service stations down by 0.6 percent in October.

Consumer spending is watched closely because it accounts for two-thirds of total economic activity. Economists said that even with the declines in September and October, which were heavily influenced by falling gasoline prices, consumer spending should be strong during the upcoming holiday season.

“Despite all the angst about a slowing economy, I don’t think Santa will be laying off any reindeer,” said Bill Cheney, chief economist at John Hancock Financial Services. “The underlying trend in consumer spending still looks pretty steady.”

A third report showed that inventories held by businesses on shelves and back lots rose by 0.4 percent in September, the smallest increase since a 0.1 percent gain in February.

The slowdown in inventory growth came as total business sales were falling by 2 percent in September. In the face of the current economic slowdown, businesses are trying to be careful to avoid a buildup to an excessive level of unsold goods.

Sales at auto dealers rose by 0.6 percent in October after a 0.7 percent September increase, but sales at department stores fell by 0.3 percent. Sales at specialty clothing stores managed just a tiny 0.1 percent increase.

“These are much softer numbers than we had expected in the wake of the drop in gas prices and suggest people are being very cautious despite the rebound in sentiment,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The overall economy slowed sharply in the spring and summer as consumers were battered by rising energy prices, higher interest rates and a cooling housing market.

Economists, however, believe that the recent significant declines in energy costs will lift consumer spirits and keep the economy from toppling into a recession.

The big movements were attributed to car and truck prices, which drove core inflation higher in September and then acted to depress core inflation in October as dealers brought back sales incentives to move a huge backlog of unsold cars. Excluding new car prices, core inflation would have risen by a modest 0.1 percent in October.

Energy prices dropped by 5 percent last month following an even larger 8.4 percent fall in September. Gasoline prices, which had been surging for much of the year, have fallen by about 80 cents since rising above $3 per gallon in early August.

Gasoline prices were down 7.9 percent last month, while natural gas, the most popular home heating source, fell by a record 9.3 percent.

The good news on wholesale inflation was expected to be seen in falling consumer prices as well. Analysts were predicting that prices at the retail level should drop by about 0.3 percent. The government will release that report Thursday.

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