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.
"The inflation threat has disappeared from the radar screen — indeed, we expect to see another sharp decline in top level consumer prices in November," said Brian Bethune, chief U.S. financial economist at IHS Global Insight. "That is providing the Federal Reserve full latitude to move rates lower in order to combat the recession as well as the ongoing financial crisis."
Bethune and other economists predict the Fed will cut a key interest rate, already at a low 1%, to 0.5% by the end of the year.
In a further sign of economic woes,the Commerce Department said Wednesday that construction of new homes plunged 4.5% in October to the lowest level on government records dating back to 1959.
Building permits, a barometer of future activity, also plummeted 12%, to a record low annual rate of 708,000 units. The embattled housing industry, which enjoyed a five-year boom, is now on pace to build the fewest homes and apartments since the end of World War II.
Commerce said construction of new homes and apartments dropped to an annual rate of 791,000 units from an upwardly revised September rate of 828,000. It was the fourth-straight monthly drop.
Previously, the slowest pace had been in January 1991, when the country was in recession.
Declines in construction last month were led by a 31% drop in the Northeast, where construction of single family homes fell to a new low. They also dropped 13.7% in the Midwest, but rose 7.5% in the West and a 1.5% in the South.
Applications for home mortgages declined last week, with loans for purchases of single-family homes falling to their lowest level in nearly eight years, an industry group reported.
The Mortgage Bankers Association said its seasonally adjusted composite index of mortgage application activity fell 6.2% to 398.6 the week ended Nov. 14.
The index was dragged lower as the MBA's gauge of loan requests earmarked for home purchases tumbled 12.6% to 248.5, lowest since the last week of December 2000.
The index for refinancing applications edged higher to 1,281.2 from 1,248.4 the previous week.
The housing slump, now in its third year, will likely linger as long as the mix of falling home prices and shaky mortgages keep foreclosure rates rising, economists say. The financial markets crisis that erupted in September and October has worsened the outlook, leading banks to pull back on already tight credit for mortgages and other loans.
The average rate for traditional, 30-year fixed-rate mortgages slid to 6.16% from 6.24% in the MBA survey. The average rate for 15-year fixed-rate mortgages, often a popular option for refinancing a home, slipped to 5.87% from 5.90%.
The average rate for one-year adjustable-rate mortgages increased to 6.8% from 6.77%.
Contributing: Sue Kirchhoff of USA TODAY; Associated Press, Reuters