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Consumers May Face Lower Inflation Risk In 2008

One bright spot in a dismal economic picture

By Mark Huffman
ConsumerAffairs.com

January 16, 2008

The U.S. Labor Department reports prices consumers paid for retail goods and services rose at three tenths of one percent in December, much slower than the nearly full percentage point gain the month before. In a separate report, the Federal Reserve reported the pace of manufacturing remained unchanged, pointing to a slowing in the economy.

Bottom line?

Price increases are slowing, along with the economy, meaning businesses have little room to raise their prices. The added bonus, economists say, is an all but certain interest rate cut then next time the Fed meets.

"If the Fed wants to help the economy, it needs to do a lot more than the expected 50 basis points on January 30," said Joel Naroff, Chief Economist for Commerce Bancorp. "As for Congress, it is an election year and the politicians want to help out in the worst way – which is the way they will likely help out.

"I have no idea what will come out of Washington but given the time it usually takes for fiscal policy to work, it will probably kick in after the recession is over," Naroff said.

While the immediate outlook might be improving, Naroff says 2007 was a particularly ugly year for consumers.

"The Consumer Price Index rose the fastest in seventeen years," Naroff said. "The 2007 December-to-December increase of 4.1 percent was well above the 2.5 percent pace posted in 2006."

The problems in 2007 were widespread, as costs for food, energy, health care, housing and education were all up over three percent.

Energy caused the most pain, up over 17 percent. Food prices shot up nearly 5 percent, and some economists warn demand for food products could drive prices even higher.

"I doubt that food costs have stabilized," Naroff said.

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