Consumer Prices Drop More Than Expected

A record plunge in consumer prices in November puts pressure on the Federal Reserve to act decisively to guard against a debilitating bout of deflation.

Consumer prices in November plunged by the largest amount on records going back 61 years as energy costs posted nearly double the decline of the previous month.

(AP Photo)

The Fed wraps up a two-day meeting Tuesday. Economists expect the central bank to cut the federal funds rate, already at a low of 1 percent, by another half-point in an effort to keep the recession from worsening.

Consumer prices, an inflation barometer, last month fell by the largest amount on records going back 61 years as energy costs posted nearly double the decline of the previous month, the Labor Department reported Tuesday.

Prices fell 1.7 percent, surpassing the previous record decline of 1 percent set in October. It was the largest one-month decline dating to February 1947. Core inflation, excluding food and energy, was flat in November after a 0.1 percent drop in October.

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The overall slide in prices reflects the big drop in energy costs in recent months. After hitting a record at $147 per barrel in mid-July, crude oil has fallen by $100 per barrel since then, pushing down the price of gasoline from a record $4.11 per gallon in July to $1.34 in the most recent Energy Department survey.

Falling prices for goods and services might sound like a good thing for consumers, but a continued downward spiral can wreak economic havoc. During deflationary periods, companies earning less react by slowing production and cutting jobs, which causes consumers to scale back spending even more. The pattern is hard to stop because it feeds on itself.

In other economic news, the Commerce Department reported that construction of new homes fell in November by 18.9 percent, the biggest drop in a quarter-century. The steep decline pushed construction down to a seasonally adjusted annual rate of 625,000 homes, the slowest pace on records dating to 1959.

The Bush administration sought to highlight the positive impact of rapidly falling inflation.

"Lower inflation data is certainly welcome for the American people," said deputy press secretary Tony Fratto. "The significant drop in energy prices acts like a huge tax cut in our economy."