Consumer prices drop the most in six years. They aren't finished.
The consumer price index (CPI) fell 0.4 percent last month, its biggest slide since 2008, thanks largely to falling gas prices. But with the dollar strengthening, wages rising, and gas prices projected to fall even more, experts say this may be the start of a much larger swoon in consumer prices.
The plunge in gas prices continues to reverberate throughout the US economy, and consumers felt it in December.
The cost of living for Americans fell by the most in six years last month. The consumer price index (CPI) fell 0.4 percent, its biggest dip since 2008, according to data released Friday by the Labor Department. The dip follows a 0.3 percent skid in November. The report’s “core” inflation measure, which excludes volatile food and fuel prices, was flat last month, not rising for just the second time since 2010.
Fuel, of course, played a leading role, plunging 4.7 percent from November. But it wasn’t the whole story. Clothing costs saw their biggest skid since 1998; airfare and auto prices also fell. Food prices fell 0.3 percent following a year when drought and disease made food overall more expensive (on a year-over-year basis, food prices increased 3.4 percent last month, easily outpacing the rate of inflation).
Global factors, including a strong dollar and weaker global demand, also contributed.
That’s good news for US consumers, who finally saw the cost slowdown reflected in their paychecks. Hourly wages adjusted for inflation ticked up 0.1 percent last month after rising 0.6 percent in November, according to the Labor Department’s Employment Cost Index. That, happily, differs from the surprise drop in wages reported in last week’s employment numbers. Combined with reports that small business owners are planning to step up hiring and increase wages in the coming months, it adds fuel to the argument that wages are finally turning a corner.
“Wage gains began accelerating in Q2 as reported in the Employment Cost Index (which is the measure the [Federal Reserve] pays the most attention to), and with a growing proportion of small businesses planning on increasing compensation, this acceleration is likely to gain steam in the months ahead,” MFR, Inc. economist Joshua Shapiro writes in an e-mailed report.
The question, now (as with almost any remotely surprising economic data), is whether the price slowdown will affect the Fed’s timeline on raising interest rates, something it is widely expected to do sometime this summer. The Fed would like to see inflation rise to 2 percent before raising rates, but the slowdown in CPI is getting it further from that goal.
Fuel prices, which are beginning to weigh on prices elsewhere in economy, show little sign of rising. The national average for a gallon of gas hit $2.08 on Jan. 15, according to AAA.
And a bigger swoon may be ahead, writes Michael Montgomery, an economist with IHS Global Insight, in an e-mailed analysis. “The big boom from gasoline is coming in January with gasoline falling close to 20 percent based on data already in hand and more moderate price drops in coming weeks than in the past four, given where crude oil stands today," he writes. “The 0.4 percentage point drag on the overall CPI should be closer to a 0.8 percentage point drag. That will be large enough all by itself to drag the total CPI into negative territory versus a year ago…The gasoline plunge was massive in the CPI for the past two months, and is about to upgrade to gargantuan in early 2015.”