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November 19th, 2008

CPI Has Caught Up With PPI

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The Consumer Price Index (CPI) exceeded analysts’ expectations dropping 1% in October. Core CPI, which excludes the volatile costs of food and energy, fell by 0.1%. The stark drop in food and energy prices, combined with an economy in slow motion, has forced the price of goods lower.

When we reported yesterday on the third-consecutive monthly drop in the Producer Price Index (PPI), we said “Cheaper costs in the coming months should begin to lower the Consumer Price Index (CPI ), a measurement of cost on the consumer’s end.” We were right — the natural lag between production and purchase explains why the PPI has dropped three months in a row, while the CPI has only experienced its first.

These two reports have begun to quell inflation anxiety, all the while stirring a new pot of worry: deflation. We’ve all seen the reports — consumer spending has plummeted, and many experts have predicted this holiday season will be one of the worst on record. If consumers adopt a retail mentality that mirrors the current homebuying mentality — since prices are steadily dropping I’ll continue to sit on the sidelines and wait for prices to continue to fall before I purchase — deflation could become a legitimate concern. A dismal outlook for the holiday-shopping season has many retailers already advertising extreme sales and low prices. Cheaper food and energy prices have provided consumers with some extra money that would have otherwise been spent on filling the tank or at the grocery store. Let’s just hope they use it.

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2 Responses to “CPI Has Caught Up With PPI”

  1. Rebecca Wilder Says: November 19th, 2008 at 6:02 pm

    Hi Tim,

    How are ya? I’m with you – not ready to call the deflation scenario. I see this report as regular recession stuff, where prices start to decline on a monthly basis. Recessions do that. In some sense lower prices are not really a bad thing if over the span of three short months, the payroll was slashed by more people that live in the city limits of Boston.

    You say, “The stark drop in food and energy prices, combined with an economy in slow motion, has forced the price of goods lower.”

    I think that you are being extremely optimistic to say that the economy is in slow motion – reverse is more like it. Furthermore, I think that food prices rose over the month.

    Thanks for the report!

    Rebecca

  2. Tim Manni Says: November 20th, 2008 at 10:34 am

    Rebecca,

    You’re right, I was definitely being kind saying the economy is slow motion.

    You also called me out for saying food prices dropped — again you got me, sort of. From Dismal Scientist:
    “Though it is decelerating, the CPI for food and beverages is now the only important component that is still recording price increases. This CPI came in at 218.7 in October, up by 0.3% from the September figure of 217.7. The largest monthly inflation rates were for non-alcoholic beverages, miscellaneous foods, and foods away from home, though fats, oils, cereals and bakery product still have the largest year-over-year inflation rates.”

    The drop in food prices was far from “stark,” (as I said) but has started to “decelerate.”

    Thanks for your interest, at least we know you’re actually reading! Haha thanks again,

    Tim

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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