Deflation fears rise as US producer prices fall at fastest rate in 52 years

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The Independent Online

Wholesale prices in the US, the world's largest economy, fell at their fastest pace in 52 years of record-keeping last month in a sign that the global economic slowdown was raising the risk of deflation. But Wall Street shrugged off the worse-than-expected data after a separate survey showed consumer confidence to be stronger than was thought.

Wholesale prices in the US, the world's largest economy, fell at their fastest pace in 52 years of record-keeping last month in a sign that the global economic slowdown was raising the risk of deflation. But Wall Street shrugged off the worse-than-expected data after a separate survey showed consumer confidence to be stronger than was thought.

The US Labour Department said its producer price index slid 1.6 per cent in October following a fall in the cost of oil and after car manufacturers slashed prices to stimulate consumers' interest. The index, which measures prices at the factory door and farm gate, had risen by 0.4 per cent in each of the two preceding months.

The so-called core index, which excludes food and energy prices fell 0.5 per cent reversing a 0.3 per cent gain in September. Analysts were expecting the main index to drop 0.4 per cent, and the core to fall 0.1 per cent.

The plunging oil price saw energy prices lead the decline with a 7.7 per cent fall, their biggest drop in 12 years. Car makers slashed prices by almost 5 per cent and offered interest-free credit in a bid to tempt buyers wary of making big-ticket purchases in the wake of the 11 September terrorist attacks. But almost every category of wholesale goods was cheaper in October.

Janet Henry, a global economist at HSBC, said: "Producer prices are now declining in year-on-year [as well as monthly] terms, which happened in the Asia crisis. People are going to talk about the risks of deflation. While that's premature, this will quash expectations that interest rate cuts will be sharply reversed in the second half of next year."

The price of oil rose yesterday after Saudi Arabia's oil minister, Ali al-Naimi, said the Organisation of Petroleum Exporting Countries (Opec) may cut production to levels last seen following the expulsion of Iraq from Kuwait in 1991. The Russian Prime Minister, Mikhail Kasyanov, said his country was also planning to cut oil output. The comments saw the price of Brent blend crude touch a high of $21.65 yesterday, after it fell to a two-year low of $18.85 on Wednesday.

Wall Street retreated on the release of the PPI data, surrendering gains made on Thursday following the hefty interest rate cuts in Europe, the UK and Japan. The Dow Jones Industrial Average fell as low as 9520.39 in afternoon trading, down 67.13 points, helping the FTSE 100 in London to close down 33.9 at 5244.2.

The slide in equity prices was arrested as the University of Michigan's index of consumer sentiment – a keenly watched measure of confidence – came in higher than expected. The index rose from 82.7 to 83.5, against expectations of a fall to 78. It was the second consecutive monthly rise since 11 September, as worries about further terrorist attacks began to ease and consumers warmed to lower mortgage rates. In August, the index stood at 91.5.

There was further troubling news from Japan, with the government forecasting the world's second-largest economy would suffer its worst contraction in 23 years of 0.9 per cent in the year to March. The government, which had previously expected the economy to grow by 1.7 per cent, yesterday presented a supplementary budget plan worth 3 trillion yen (£17bn).

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