- The Washington Times - Saturday, January 17, 2009

Consumer prices fell in December for the third month in a row, as some analysts raised the specter of debilitating deflation — a continuing, across-the-board decline in prices.

After falling by 0.7 percent last month, consumer prices ended up increasing by only 0.1 percent during 2008. It was the lowest inflation rate since 1954, the Labor Department reported Friday.

Meanwhile, industrial output at the nation’s factories, mines and utilities declined 2 percent in December, the Federal Reserve reported. During the fourth quarter, as credit markets froze and the financial industry nearly imploded, industrial production plunged at an annual rate of 11.5 percent, the steepest quarterly decline since 1980.

As the U.S. and worldwide recessions deepen, markets for industrial output are evaporating across the economic spectrum.

“Consumer spending is plunging, businesses are cutting back on their investment plans and the export cushion — which has been supporting manufacturers — has disappeared,” said Nigel Gault, chief U.S. economist for IHS Global Insight.

Manufacturing, which fell 2.3 percent in December as auto production plunged, has led the decline in industrial production.

“Manufacturing output has now fallen over five consecutive quarters and is down 10 percent from a year earlier,” said Aaron Smith, an analyst at Moody’s Economy.com. “The decline in the fourth quarter was more than twice as steep as that seen in the 2001 recession, making this downturn look more severe than anything experienced in the last three decades.”

The 2008 collapse in manufacturing was “the worst annual drop since World War II demobilization in 1945,” said Charles McMillion, chief economist for MBG Information Services. “U.S. manufacturing production today is less than it was in December 1999. That is the first nine-year decline in U.S. manufacturing production since the mid-1930s, and it comes as the current downturn is worsening.”

Capacity utilization, the rate at which production facilities operate, fell below 75 percent in December, reaching the lowest rate in more than 25 years. In manufacturing, plant use was just 70.2 percent last month.

“Manufacturers now have almost 30 percent of their existing capacity sitting idle, raising unit costs, suggesting significant plant closings lie immediately ahead with little new investment, including hiring, any time soon,” Mr. McMillion said.

On top of the 7.8 percent decline in industrial output last year, IHS Global Insight is forecasting that industrial production will plummet 8 percent this year.

Last year was a topsy-turvy year for consumer prices. In July, the 12-month inflation rate had reached a 17-year high of 5.6 percent, igniting worries about spiraling inflation as the price of oil reached an historic high of $147 per barrel and gasoline jumped above $4 a gallon.

Then the U.S. and world economies hit a brick wall.

Prices of oil and gasoline went into free fall, and average consumer prices began a steep descent. During the fourth quarter, consumer prices plummeted at an annual rate of 12.7 percent.

However, what has really fanned the fears of deflation is the fact that core consumer prices, which exclude energy and food, have been essentially flat since August and are projected to remain flat during 2009.

“The prospect of such low [core] inflation rates is ringing deflation alarm bells at the Fed and also emphasizes how badly needed is the demand support from the fiscal stimulus package,” Mr. Gault said.

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