US consumer prices fell last month for the first time in nearly two years as oil prices dropped sharply from record highs in a sign that inflation may have peaked, data from the Department of Labor indicated.
The consumer price index fell last month by 0.1 per cent after rising 0.8 per cent in July on a monthly basis, in line with economists’ forecasts, the first drop since October 2006.
“There’s no question in my mind that the inflation scare of the last few years is now behind us and inflation is set to modify in a very significant way,” said Mark Vitner, an economist at Wachovia.
The report comes after data last week showed a sharp drop in producer prices and the cost of imports, led by falling energy costs, and is a boost for the US economy as it navigates the deepening financial turmoil.
It also provides increased leeway for the Federal Reserve to cut interest rates – which could help to reduce defaults on home loans and foreclosures, and ease strains in the financial system.
“The latest CPI and producer price index data should give the Fed some much-needed breathing room,” said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon.
However, while oil prices – which hit a record $147 a barrel in mid-July and has since fallen below $100 – will reduce the pain felt by consumers at the petrol pump, the drop is spurred by a slowing global economy that is reducing demand.
Energy prices slipped back by 3.1 per cent in August after three months of sharp rises, the CPI showed, and petrol prices fell by 4.2 per cent. On Monday, oil prices hit a seven-month low.
Nevertheless, rising prices still remain a concern for the Fed, with the CPI indicating that year-on-year inflation in August rose by a sharp 5.4 per cent, only slightly less than the 5.6 per cent rate in the previous month that was the highest since the 1991 Gulf War.
Core inflation, which excludes volatile food and energy prices, rose by 0.2 per cent, less than the 0.3 per cent increase in July but still close to recent trends. Year-on-year inflation was 2.5 per cent, the same as in the previous month and above the Fed’s preferred 2 per cent upper boundary. Economists expect a decline in core inflation to lag the headline figure by a few months as businesses seek to make up for facing squeezed margins while prices were rising fast.
Good news on the inflation front was added to by hopeful signs in the housing market as an index of homebuilders’ confidence increased in September for the first time since February, rising two points to a level of 18 from its all-time low in the previous two months.
Builders felt more hopeful after the introduction of a first time buyer tax credit and after the takeover of Fannie Mae and Freddie Mac by the US government promised to keep mortgage rates lower, the report from the National Association of Homebuilders said.
