Economy flashes signs of weakness in prices, housing

WASHINGTON -- Signs of a weaker economy flashed unmistakably Wednesday.

Consumer prices and new home construction plummeted at record rates in October, and new mortgage applications fell in the most recent week, government and industry groups reported Wednesday.

Core consumer prices, a measure that excludes include food and energy, actually dropped 0.1% last month; first such decline in more than 25 years.

The 1.0% overall drop in the consumer price index is the biggest on seasonally adjsuted inflation records dating back to February 1947.

Overall, consumer inflation has fallen at a 4.4% pace the past three months. Price declines have been largest in the energy sector, where prices fell 8.6% in October and have dropped at a 43.1% annual pace since August. Lower prices in October included clothing, airline tickets, autos and some commodities.

Consumers seeking relief from high grocery bills, however, may have to wait a little longer.

Retail food prices rose 0.3% in Otober and increased 6.3% the past 12 months. Still, October was an improvement, given that food prices had been rising at a 0.6% monthly pace.

Tumbling prices are good news for consumers' purchasing power, but also bad news, because they are a reflection of the deep deterioration in the U.S. and world economy.

Roger Kubarych, economist at Unicredit, notes the downsides: Used car prices, for example, have dropped more than 5% from a year ago. That means the value of consumers' main assets, cars, homes and stocks, are all declining. Further, "It doesn't make people feel more confident in buying a new car, to the dismay of GM, Ford, and Chrysler," Kubarych says.

The decline in consumer prices is a sharp turnaround from just months ago, when many economists warned of a dangerous price spiral, fed by record oil prices, and urged the Federal Reserve to start raising interest rates to try to slow the economy and staunch inflation.

With home prices continuing to fall, some economists now fret about the prospect of deflation, a widespread, sustained fall in prices that can create a different set of economic problems, mainly by making consumers even more reluctant to spend on goods that could be cheaper next month.