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Friday, January 16, 2009 11:32 AM

CPI at .1% Annually, Smallest Increase Since 1954

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Even without properly accounting for housing which would drive the CPI hugely negative, the 2008 U.S. Consumer Price Gains Slow to 0.1% Annual Pace, the smallest increase since 1954.

The cost of living in the U.S. fell in December as the recession deepened, capping the smallest annual gain in a half century.

Americans paid 0.1 percent more for goods and services in 2008, the Labor Department said today in Washington. Consumer prices fell 0.7 percent in December after dropping 1.7 percent the prior month. Excluding food and energy, costs were unchanged.

Today’s report underscores the destruction of companies’ pricing power, and the danger of a sustained decline in prices that would deepen the economic downturn by making debts harder to pay off. Federal Reserve Bank of San Francisco President Janet Yellen warned yesterday it’s “not acceptable” for policy makers to allow inflation to fall “to levels that are unhealthy.”

“Deflation is on the radar,” said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina, which accurately forecast the annual core increase. “There’s just not a lot of fuel for the inflation fire.”

Deflation is "not on the radar", deflation is here and now given that deflation is a monetary phenomenon not a price phenomenon as noted in Humpty Dumpty On Inflation.

BLS Consumer Price Index

Here is the BLS Consumer Price Index December 2008

On a seasonally adjusted basis, the CPI-U decreased 0.7 percent in December, the third consecutive decline. The index is now only 0.1 percent higher than in December 2007. Declining energy prices, particularly for gasoline, again
drove most of the decline. The energy index declined 8.3 percent in December. Within energy, the gasoline index fell 17.2 percent and accounted for almost 90 percent of the decrease in the all items index. The index for household energy declined 0.7 percent. Excluding energy, the index was virtually unchanged for the third straight month. The food index declined 0.1 percent in December, the first decrease since April 2006, as many meat, dairy, fruit, and vegetable indexes decreased.

The index for all items excluding food and energy was virtually unchanged in December. Continuing decreases in the indexes for lodging away from home, airline fare, and new and used motor vehicles, along with downturns in the indexes
for apparel and recreation, offset increases in other indexes including rent and owners’ equivalent rent, medical care, and education.

For the 12 month period ending December 2008, the CPI-U rose 0.1 percent. This was the smallest calendar year increase since a 0.7 percent decline in 1954 and compares with a 4.1 percent increase for the 12 months ended December 2007.Consumer prices declined at a seasonally adjusted annualized rate (SAAR) of
12.7 percent in the fourth quarter of 2008.

click on chart for sharper image

The CPI is still rising year over year, but barely, and only because of food. With the drop in food prices at the commodity level some relief in food prices may be coming, possibly with a lag.

For many months now I have been saying the CPI was going to go negative and stay there for quite some time. This was an easy call to make given the plunge in commodity prices in general and gasoline prices specifically.

The effect would be even greater if housing prices were properly reflected in the CPI.

Housing And The CPI

For more on housing in the CPI please see CS-CPI Negative 3.1% Year over Year in November. Note, that the above link reflects last month's CPI. I will have an update on the December CS-CPI towards the end of the month when the Case-Shiller housing data is released.

For a point of reference, compare the CS-CPI to ShadowStats. I suggest Shadowstats is wildly off on the high side, predominantly because of failure to account for housing which is in reality a consumable.

PPI Negative Year Over Year

In December U.S. Producer Prices Fall 1.9% as Fuel Costs Plunge
Prices paid to U.S. producers fell 1.9 percent in December, capping the first annual decrease in seven years, as demand for raw materials collapsed with the deepening recession.

The global slowdown has caused sales at companies such as Alcoa Inc. to slump, leading to cutbacks in output and hiring that are reverberating through the economy. Falling commodity costs and asset values are raising concern among some Federal Reserve officials about the danger of deep and extended price decreases that would worsen the economic downturn.
Inquiring minds are taking a look at the BLS Producer Price Indexes For December 2008
The Producer Price Index for Finished Goods fell 1.9 percent in December, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decrease followed a 2.2 percent decline in November and a 2.8 percent drop in October.

At the earlier stages of processing, prices received by producers of intermediate goods fell 4.2 percent in December after decreasing 4.3 percent in the prior month, and the crude goods index declined 5.3 percent following a 12.5 percent drop in November.

click on chart for sharper image

The Producer Price Index has been negative for five consecutive months and has gone negative year over year for the first time in seven years.

After predicting deflation for several years, on March 17th 2008 I stated it had arrived.

Deflation Call Timeline

March 17, 2008 Now Presenting: Deflation!
Current accounting rules allow banks to pretend. And certainly the Fed is going out of its way to bend the rules to allow new forms of pretending. Expect to see still more accounting rules that allow broker dealers to pretend.

However, all the pretending and misdirection about the sinking dollar and the price of gold cannot stop the fact that deflation is about contraction of money supply and credit. The former is not growing and the value of the latter is collapsing no matter how many pretend otherwise.

It's time to face the facts: Deflation is right here right now.
April 22, 2008 Deflation In A Fiat Regime?
The Fed clearly cannot force home prices up. If they could, they would have done so already. Yes, the Fed can cheapen the dollar, but the Fed cannot force banks to lend or force companies to hire. Without jobs and without rising wages, the Fed can lower interest rates to 0% and it will not stop a destruction of credit.
August 10, 2008 The Future Is Frugality
We are in deflation now, but few see it because they do not understand what deflation is: a net contraction of money supply and credit.

The only question now is how long deflation lasts, not whether it gets here.
October 10, 2008 Roubini Discusses the Double D's, Deflation and Depression
So far, none of the liquidity measures taken by the Central Bankers have worked.
The reason is simple: You Cannot Patch a Busted Dam With Water no matter how hard you try.
November 11, 2008 Industrial Bond Yields Strongly Support Deflation Thesis
Those harping about prices of consumer goods, food, services, etc., are missing the boat about what deflation is and what one should expect in deflation. Trillions of dollars of debt are being wiped off the books via bankruptcies and foreclosures while inflationistas worry about the price of eggs going up by 35 cents.

The data are crystal clear. We are not in a period of inflation, we are not in a period of stagflation, we are not in a period of disinflation. If you exclude all the options proven to be impossible, the remaining option no matter how unlikely it may seem at first glance, must be the correct answer. That answer is deflation. We are in it, and have been for some time.
Those who focused on Peak Credit and its counterpart Peak Earnings saw this coming. Those blindly looking at prices or money supply alone are still trying to figure out how and why treasury yields are where they are, the stock market has collapsed, commodities have plunged, and banks are scared to death to lend.

Looking ahead, there is every reason to expect increasing foreclosures, rising unemployment, rising bankruptcies, rising defaults, and rising corporate bond yields. Yet Bernanke cannot cut rates as the Fed Funds Rate is effectively trading at zero.

Welcome to deflation Ben Bernanke. You, Greenspan, and the Fed fueled it with your serially bubble blowing activities. Given that Social Mood Will Define The Future, those expecting inflation to come roaring back anytime soon are mistaken.

Mike "Mish" Shedlock
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