Falling Consumer Prices Signal What We Already Know
By: The Labor Department reported that consumer prices fell 1.7% last month, a steeper drop than analyst expectations of 1.3% and October's 1% decline. Energy prices dragged the CPI down, tumbling 17% month-over-month with a fall in gasoline prices of 29.5%.
If you're not familiar with the CPI, let's break it down - sometimes referred to as "headline inflation," the CPI examines the weighted average of prices of a basket of consumer goods and services - including things like transportation, food, medical care, and energy. The CPI is calculated by taking averages of the price changes for each of those items, weighting them according to their importance. Changes in CPI relate back to price changes associated with the cost of living - a rise in the CPI over a short period of time denotes inflation, a drop signals deflation.
So what does November's CPI number really mean to us? It's further indication that demand for consumer goods is down as a result of a shift in spending habits due to the credit crunch. The takeaway here is pretty clear: while we might feel a little less pain at the pump or at the store, deflation and continuing weakness in economic data is likely to push consumer confidence lower at a time when we need signs of stabilization the most, and falling prices are likely to give the Fed more reason to cut its benchmark rate to 0.5% later today.
Jackie DeAngelis is a writer and producer at CNBC. Previously she worked as a financial analyst at Oaktree Capital Mgmt. Jackie earned her J.D. from Rutgers Law School in 2008 and her B.A. in Asian Studies from Cornell University in 2002
