U.S. prices, output fall
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November 16, 2001: 10:29 a.m. ET
Key inflation gauge pulled down by energy prices; industrial output falls.
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NEW YORK (CNN/Money) - Consumer prices fell in the United States in October, the government said Friday, led by plunging energy prices and continuing weakness in the world's largest economy.
The Consumer Price Index, the government's main inflation gauge, fell 0.3 percent, the Labor Department reported, after rising 0.4 percent in September. Analysts surveyed by Briefing.com had forecast a 0.3 percent drop.
A whopping 6.3 percent drop in energy prices - the biggest since March 1986 and the second-biggest drop since the department started keeping track of the data in 1957 - led the decline. Energy prices rose 2.6 percent in September.
The "core" CPI, which excludes often-volatile energy and food prices, rose 0.2 percent in October after rising 0.2 percent in September. Economists surveyed by Briefing.com expected core CPI to be flat.
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CNNfn's Kathleen Hays takes a closer look at the industrial production numbers.
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Separately, the Federal Reserve reported industrial production fell 1.1 percent in October after falling 1.0 percent in September. The 13th straight decline was the biggest since a 1.3 percent drop in November 1990 and marked the longest string of declines since 15 straight from 1931 to 1932. Economists surveyed by Briefing.com had forecast a 0.9 percent drop.
The Fed also said factories, mines and utilities ran at 74.8 percent of capacity in October - the lowest rate since June 1983 - down from 75.5 percent in September. Economists expected capacity utilization of 74.7 percent.
U.S. stocks were mixed in early trading, while U.S. Treasury bond prices, after rising in early trading, fell again, adding to their recent losses.
Click here for CNNmoney.com's economic calendar
The Fed keeps a close eye on inflation, but has seen little threat of it in recent months, leaving it free to slash its target for short-term interest rates a record 10 times this year to keep consumers spending and avoid a recession.
Though most economists expect a recession this year, they also expect a recovery next year, driven by the Fed's cuts and what will likely be a multi-billion-dollar stimulus package from Congress - if Congress can ever agree on one.
Because of these expectations and the threat of future inflation, bond prices have plunged in recent days, and some economists are beginning to wonder if the Fed's work is nearly done.
"I think the Fed will take it very slowly from here on in," Robert Goodman, chief economist at Putnam Investments, told CNNfn's Before Hours program. "The Fed is cognizant of the fact that we are going to get massive fiscal stimulus in the next couple of months."
Also falling were transportation prices, led by a 10.7 percent drop in gasoline, which is not included in the energy component, a 2.5 percent drop in airline fares and a 0.3 percent drop in used cars and trucks.
Declines in the headline CPI number have been extremely rare in recent decades. Consumer prices rose without interruption from February 1967 to November 1982. Since two straight declines in November and December of 1982, CPI has fallen in only 6 months - two of which were July and October of this year.
But the big drop, economists said, was largely a recovery from the big jump in gas and energy prices in September, driven by the Sept. 11 terror attacks. Another drop is likely on the way in November.
Still, even core inflation, ignoring the wild swings in energy, is likely to remain low, thanks in part to the low capacity utilization the Fed reported Friday.
"Inflation springs from how intensely resources are used," said James Glassman, chief U.S. economist at J.P. Morgan Chase. "There is an enormous amount of unused capacity sitting out there, and it takes a lot of growth to absorb that."
As the Fed's data showed, the manufacturing sector has been in a recession for more than a year, which has led to more than a million job losses. The Fed's cuts and the expected stimulus from Congress are designed to help consumers ignore an unemployment rate that could pass 6.0 percent before the labor market recovers.
Consumer spending fuels two-thirds of U.S. gross domestic product (GDP), the broadest measure of the economy. GDP shrank in the third quarter and is expected to do so again, meaning the common definition of a recession - two straight quarters of negative GDP - will be met.
Most economists expect a recovery by the second half of next year. But the drop in energy prices - which won't end soon, apparently, since oil-producing nations can't seem to agree to cut production - could hasten the rebound.
"Oil producers are squabbling over production cuts, and a price war seems possible," said Bill Cheney, chief economist at John Hancock Financial Services. "If they can't get their act together, prices could fall further and stay down for another three to six months. That's more money in consumers' pockets and even more stimulus for the economy."
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