Consumer prices fall 1 percent in October, biggest drop on record
Thursday, November 20, 2008
WASHINGTON -- American consumers hit by a seemingly endless stream of bad news, from vanishing jobs to shrinking retirement accounts, got a small dose of relief: lower prices at stores.
The Consumer Price Index, the country's most closely watched inflation gauge, dropped 1 percent in October, the biggest monthly decline on records dating back to 1947, the government reported Wednesday. Over the past year, though, consumer prices are up 3.7 percent, which is faster than wage growth over the same period, putting a squeeze on household budgets.
Even with the monthly price reprieve, consumers are in no mood to go on a shopping spree. They have been cutting back sharply on spending because of the strains from job losses, shrinking nest eggs and falling home prices.
Many predict economic activity will continue to shrink through the rest of this year and during the first three months of next year, more than satisfying one definition of a recession -- that is, two straight quarters where the economy contracts.
Another report out Wednesday showed that the housing market, one of the economy's weakest spots, continues to be in a deep funk. Builders cut home construction by 4.5 percent last month driving it down to the lowest level on records going back to 1959.
Meanwhile, chiefs from the nation's struggling auto companies were set to return to Capitol Hill to make a fresh plea for financial aid.
Detroit's Big Three automakers begged Congress on Tuesday for a $25 billion lifeline to save their teetering companies. They warned of economic upheaval and millions of layoffs if one of the companies were to collapse.
"Our industry ... needs a bridge to span the financial chasm that has opened up before us," General Motors chief executive Rick Wagoner told the Senate Banking Committee on Tuesday. He blamed the industry's predicament not on failures by management but on the deepening global financial crisis.
The new auto rescue plan, however, appeared stalled on Capitol Hill, opposed by Republicans and the Bush administration not willing to dip into the Treasury Department's $700 billion financial bailout program to come up with the $25 billion in loans.
Faced with lawmakers upset by shifts in the bailout strategy, Treasury Secretary Henry Paulson defended his handling of the $700 billion program in a separate hearing Tuesday.
Members of the House Financial Services Committee grilled Paulson for not doing enough to help distressed homeowners and for failing to force banks that get some of the bailout money to specifically use it to bolster lending to customers, one of the prime reasons behind the rescue package.
"It is essential" that some of the bailout money be used to ease foreclosures, said the panel's chairman, Rep. Barney Frank, D-Mass., a key player in shaping the package that Congress passed and President George W. Bush signed into law Oct. 3.
In a break with the administration, Federal Deposit Insurance Corp. chairman Sheila Bair, made a fresh pitch for using $24 billion of the bailout pool to help Americans at risk of losing their homes. House Speaker Nancy Pelosi is urging Paulson to support the FDIC plan.
Although Federal Reserve chairman Ben Bernanke told lawmakers that in cases of some home loans, the FDIC plan could saddle heavy costs on the government, he said it is still a "very promising approach."
While Paulson was resistant to using some of the bailout money to provide mortgage guarantees, he said the administration will look for ways to provide foreclosure relief.
The Treasury chief found himself on the hot seat just one week after he officially abandoned the original rescue strategy of buying rotten mortgages and other bad assets from financial institutions. That had been the main thrust of the plan Paulson and Bernanke originally pitched to lawmakers.
"It appears that you seem to be flying a $700 billion plane by the seat of your pants," said Rep. Gary Ackerman, D-N.Y.
Focusing the bailout program on infusing billions into banks -- and possibly other types of companies -- to pump up their capital and bolster lending to customers was deemed a faster and more effective approach to stabilizing the financial system than the original centerpiece of the plan, Paulson said.
So far, the Treasury Department has pledged $250 billion for banks and has agreed to devote $40 billion to troubled insurer American International Group-- its first slice of funds going to a company other than a bank. That leaves just $60 billion available from Congress' first bailout installment of $350 billion.
Paulson said he is not planning to initiate another capital injection program beyond those already announced. Thus he's unlikely to tap the remaining $350 billion before the Bush administration leaves office on Jan. 20.