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CPI posts biggest drop since 1949
Gasoline leads steep overall decline but core reading points to lingering inflation pressures.
December 15, 2005: 1:41 PM EST
By Chris Isidore, senior writer
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NEW YORK ( - Consumer prices took their biggest tumble in 56 years in November, led by a plunge in gasoline prices, the government said Thursday, but analysts and investors believe that the threat of higher inflation has not passed.

The Consumer Price Index sank 0.6 percent in November, the biggest month-over-month drop since Harry Truman was president back in July 1949, according to figures from the Labor Department.

Economists surveyed by had forecast a decline of 0.4 percent. The CPI rose 0.2 percent in October after jumping at the fastest rate in 25 years in September, spurred by rising oil prices after Hurricane Katrina.

But energy prices fell 8 percent last month, contributing to the overall drop in the CPI, the government's main inflation gauge.

Gasoline prices tumbled 16 percent and natural gas prices slipped a scant 0.5 percent after soaring for two straight months. But electricity prices rose 3.8 percent from October.

The closely watched "core CPI," which excludes often volatile food and energy prices, rose 0.2 percent, the same as the gain in October and in line with average forecasts.

Some economists expressed concern about inflationary pressures despite the big drop in the overall CPI.

"It looks like a great headline number, but there are things to keep an eye on in this report," said Mathew Martin, senior economist with

"There's not a lot of good news here outside of gasoline, especially given what's happen with crude oil futures since beginning of this month. Given the risk on heating prices that we're seeing for the rest of winter, this might be a temporary ebb in inflationary pressures."

Key number for the Fed

The CPI report is always closely watched but took on added importance this week when the Federal Reserve signaled it may be near an end to its recent campaign to boost interest rates.

The reaction on Wall Street was muted. Stocks opened slightly higher, while bond prices actually slipped a bit, lifting the yield on the 10-year treasury to 4.48 percent from 4.44 percent Wednesday. Bond prices and yields move in opposite directions.

Over the last 12 months consumers prices have risen 3.5 percent, a bit more than the 3.2 percent rise in average hourly wages over the same period, according to a separate Labor Department report. That means that the average hourly worker saw his or her paycheck lose ground to prices over the last 12 months.

The core CPI is up 2.1 percent during that time. The 2.1 percent core rate is at the upper end of the range that economists believe the Fed will tolerate as it tries to maintain price stability.

Still, one economist said the CPI report was basically good news for those looking for the Fed to end or at least pause in its course of quarter-percentage point rate hikes sooner rather than later.

"I remain confident that such a development will be welcome news to Fed policy-makers," said Anthony Chan, senior economist with JPMorgan Asset Management. "My overall suspicion is that if energy prices continue to stabilize or even decline slightly, policy-makers will find that the inflation bogeyman is not likely to be as powerful as once feared moving forward."

There is broad agreement that the Fed will raise rates by another quarter point at its January meeting, its last with Alan Greenspan as chairman.

But there's debate about whether there will be another increase, or perhaps more than one, once Greenspan's expected successor, Ben Bernanke, takes the helm of the central bank.

Martin at said this report suggests a risk that the Fed will go ahead with at least one more rate hike after January. He said prices are increasing in the service sector, and that the drop in energy prices in Thursday's report won't be repeated in the next three CPI reports before the March Fed meeting.

"Those will be three crucial months to see if some of these things that are nascent develop into trends," he said.

For more on the economy and what it means to you and the markets, click here.  Top of page

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