Economists Say to Expect "Huge Declines" in Consumer Prices in Coming Months

(CEP News) - Economists say U.S. consumer prices were tamer than anticipated and that in the months ahead, prices will continue to deflate. Oil prices are significantly down from the peak seen in July, and weakening demand at home and abroad will put broad pressure on lower prices going forward.

"Inflation has peaked," said Ian Shepherdson, chief U.S. economist at HFE. He said to expect "huge declines" in the headline and slower rises in core inflation as well. He predicts a negative year-over-year headline by the middle of 2009.

The seasonally adjusted CPI report was flat in the all-items index, and rose less than expected in the core index, rising by 0.1% in September. Annually, all-items inflation is up 4.9%, and core inflation is up 2.5%, according to data released by the U.S. Labor Department on Thursday.

"[W]ith global food prices having dropped sharply in recent weeks, there should be some relief over the next few months," Shepherdson added.

Senior U.S. economist Paul Ashworth from Capital Economics noted that the 2.5% annual pace of core inflation is still a half-point above the Fed's preferred rate of inflation, but weakness in the economy points to a drop in that figure soon. "[W]ith the economy stuck in what is looking more and more like a deep recession, we suspect that core inflation will soon begin to drop back as well."

Guy LeBas, fixed income strategist at Janney Montgomery Scott, said the release "indicates once again that inflation remains of limited concern against a backdrop of weakening consumer demand." He noted that "the sustained decline in commodities prices" takes pressure off the headline figure, though consumers may not see the benefits from that for some time.

Energy prices fell 1.9% in September, but have gained 23.1% on the year, while gas prices fell 0.6% in the month, but have risen 31.7% in the year. Fuels & utilities fell 2.8% in the month, but rose 11.8% on the year.

Prior to the release, John Glassman, head trader and managing director for Pacific American Securities, said markets right now have more immediate concerns than a slight gain in prices. "I think inflation is being thrown out the window," he said.

The CPI report follows the release of the producer price index on Wednesday, which showed a bigger than expected increase in core prices. The annual core rate for PPI advanced to a 17-year high at 4.0%, but with economies weakening across the globe, analysts say it's only a matter of time before prices begin falling, which should give the Fed a green light to cut interest rates further if needed.

By Patrick McGee,, edited by Sarah Sussman,