Inflation concerns and growing consumer prices had spent much of the middle part of 2008 tucked just behind a slowing economy in order of Fed concerns. During mid-July, gas prices cleared $4.00 per gallon and consumers were finding staple groceries like milk, eggs, and bread with expensive price tags. In fact, discussion about rate hikes at the turn of the 2007-2008 calendar years included concern about growing inflation. Wholesale prices set historic marks for growth during the summer months.

Now, before 2008 closes, consumer prices are on the front page of many business news publications for a different reason. According to a report just released Wednesday morning (November 19), consumer prices plunged by the largest margin in 61 years of record keeping, during the month of October. The one percent dip in consumer prices doubled the analyst estimates for a .5 per cent drop.

Although gas and energy costs had much to do with the significant fall, core prices, which excludes these items, also fell by .1 per cent. This marks the first drop in core consumer prices in 25 years. Even though a potential deflation, similar to that which occurred during the great depression, concerns some, most analysts believe the current price declines are more likely to produce more positive effects.
Rapidly declining prices that create a period of deflation could have negative economic effects in some environments. However, the current twelve month growth of 3.7 per cent means prices are still operating a reasonable annual growth level. Consumers are certainly happy for the price declines at the pump and at the market. The Fed also has the ability to deliver more rate cuts, if necessary, without fear of prompting inflation.

The Labor Department’s consumer price report is not the only financial announcement of historic implications. The Commerce Department also reported that new home construction rates fell by the largest amount ever during October. Construction of new homes fell by 4.5 per cent during the month, its steepest decline since records were initially kept in 1959. Building permits also fell sharply suggesting no immediate return to new home construction. Many builders are simply cutting costs and reducing construction in the midst of economic and housing market uncertainty.
According to the report, new home and apartment construction dropped annually to 791,000. The September rate was 828,000 units. The October rate was slightly above analyst estimates of 780,000 units, but October was the fourth consecutive monthly rate decline in new homes.

Despite the gloomy news of today in new home construction, some analysts are attempting to renew hope with predictions that housing could bottom out as soon as mid-2009. This could mean more months of struggles, but a 2009 bottom would likely be welcomed by most people looking at the current scenario.
At some point, low consumer prices and Fed rate cuts may help push the economy ahead as the market becomes less frightened about a deepening economic situation. With jobs data looking sour and other scary news on Wall Street, it might take some time for these effects to develop.

Market Recap
Equities were hit hard on Monday as the economic concerns heightened. The Dow lost 221 points. Discussion about the possible inclusion of the Big 3 US automakers in the $700 billion bailout plan is the hot topic of the day and week. Stocks were somewhat volatile during Tuesday’s trade. Continued concern over the economy sparked early losses, but bargain buying and oil and consumer price drops gave investors hope. The Dow gained 151 points on the day. Consumer prices fell by the largest amount in 61 years during October.

Neil Kokemuller
Wednesday, November 19, 2008
9:31 AM EST
Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.
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