By Amey Stone Fearing that rising energy costs and a tighter labor market will trigger inflation, the Federal Reserve Board voted on Nov. 1 to increase short-term interest rates to 4% -- its 12th quarter-point increase since it started its rate-tightening campaign in mid-2004 (see BW Online, 11/2/05, "Greenspan's Parting Moves").
Yet even as Greenspan & Co. maintain their vigilance as inflation fighters, there's contrarian news on the inflation front and good news for consumers: Prices of many goods and services are in the process of falling -- some of them quite sharply.
Most important (as far as economists are concerned), crude oil has slid to $59.85 a barrel from its late-August high of $70.85 following hurricane Katrina. Gasoline prices are also dropping. As of Oct. 31, the average price for a gallon of gas in the U.S. was $2.48, down from a high of $3.07 on Sept. 5, according to the U.S. Energy Information Administration. Most economists expect oil prices to fall further but to remain in the $50-a-barrel range.
MORE HOMES AVAILABLE. Even autos are getting more affordable. Ford (F), which on Nov. 1 reported a 26% year-over-year tumble in sales for October, cut the sticker price on the redesigned 2006 Ford Explorer (with models listing from $27,000 to $36,000) by $1,700. In mid-October it introduced 72-month, 0% financing on some truck and sport-utility vehicles. The idea behind that was to offer customers six years of savings worth $63 dollars a month vs. traditional 7% financing. That's roughly equal to a free tank of gas, says Ford spokesman Jim Cain.
Housing prices have dipped as well in recent months. In September the median new home price was $215,700, down from $228,800 in August. The supply of new homes jumped to 4.9 months worth in August and September, from 4.2 months in July. The inventory of existing homes rose as well. "In the last three months we've seen a lot of homes selling for less, which might be the beginnings of a downturn in the housing market," says Dean Baker, co-director of the Center for Economic & Policy Research.
Consumer electronics -- perennial price droppers -- continue to provide some serious deals for consumers. According to NPD Group, an average 42-inch high-definition plasma TV set cost $4,886 in October, 2004, but $2,661 a year later. Likewise, the average price of a notebook computer declined from $1,422 in October, 2004 to $1,081 this October.
CHICKEN AND STEEL. "When you think of falling prices, there are some products that fall in price and some where you pay the same price, but you get a lot more for the same amount of money," says Stephen Baker, director of industry analysis at NPD Group. "In the technology business, both these things happen."
A little less obvious are lower food prices. Research firm Action Economics notes a 6% drop in agricultural prices in the past month. Poultry is getting cheaper, too. By the end of October skinless boneless chicken breast prices had declined to $1.30 from $1.50 in September, noted First Boston in a recent report on Pilgrim's Pride (PPC).
Some commodity prices have also stumbled lately. A surge in supply from China, which has ramped up production, has led to falling steel prices. The Rogers International Commodities Index, a diversified mix of energy, metals, and agricultural commodities, dipped 3.8% in October, although it's still about 10% higher than it was a year ago.
ONLY TEMPORARY? Take it all together, and October's consumer price index, which won't be reported until mid-November, may have actually declined by 0.1%, thanks to lower food and energy prices, forecasts Action Economics. Core prices, however, which exclude food and energy, probably increased 0.2%.
Declines in some consumer prices are coming just in time for holiday shopping -- a relief to some economists. "Despite all the fears about higher energy eating into discretionary spending, those increases are partly offset by continued declines in prices for clothing, accessories, and footwear," says Richard Hastings, senior retail sector analyst at Bernard Sands.
Time to celebrate? Recent price setbacks may only be temporary, caution some analysts. "In my view this is just a normal correction in the middle of an ongoing bull market," says Jim Rogers, a private investor and author of Hot Commodities. "Things that have gone up the most are the most likely to correct," he points out, such as the price of gasoline.
A FED CLUE? Most of the items noted for falling in price recently -- oil and houses, included -- are still higher than a year ago. And in lots of areas prices continue to rise -- most notably in natural gas, which spiked the last week in October. "I know inflation is here. Anyone who says prices haven't been going up is either nuts or a liar," Rogers says.
The Federal Reserve took pains to note in its statement released Nov. 1 that it's reacting to a "cumulative rise in energy and other costs." Some economists think that wording reveals a nod to the fact that some prices have dropped a bit lately. "'Cumulative' is new, and presumably is intended to mean that the dip in energy prices over the past couple of months is not enough to assuage inflation fears," noted Ian Shepherdson, chief U.S economist for High Frequency Economics in a note to clients on Nov. 1.
Consumers still need to mount their own fight against inflation at home (see BW Online, 10/20/05, "How to Ease Inflation's Squeeze"). But the good news is that falling prices in some categories will undoubtedly offset the gains. "Fortunately, there's a nice logic to pricing in consumer goods," says Hastings. "Industry can always respond to a modest slowdown in sales with more promotions." Even though the Fed sees inflation risks rising, falling prices in at least a few areas may ease the pain.
Stone is a senior writer for BusinessWeek Online in New York