Friday, December 14, 2012

Consumer Prices Are Declining ... It's the "Fuel" for Better Days Ahead

We received some more good news on the economic front this morning as consumer prices fell from last month's level.

The biggest contributor to the fall in consumer prices was the decline in energy prices. That's a very good sign for the future as our U.S. economy struggles to regain its footing.

Of course, lots of consumer debt is still a very big part of our individual financial situation as well. In that regard, low interest rates will help make it easier for consumers to make their debt service payments. Meanwhile, low rates will also enable more individuals to afford home mortgages and related home purchases, too.

So while we still have many difficult issues ahead of us, low interest rates and low energy prices will help to put more money in consumers' pockets. This in turn should provide a much needed assist to economic activity resulting in higher consumer spending levels.

And since consumer spending accounts for approximately 70% of our nation's economic activity, any sign of higher spending by consumers points the way to a sustained economic recovery.

Consumer Prices Fell in November has today's good news:

"U.S. consumer prices fell in November as the cost of gasoline declined.

The index of consumer prices decreased 0.3% in November after rising slightly the prior month, the Labor Department said Friday. The consumer-price index measures what Americans pay for everything from groceries to hospital stays.

Economists surveyed by Dow Jones Newswires expected overall prices would drop 0.2% but so-called core prices—which don't take into account the volatile food and energy sectors—would rise 0.2%.

Gasoline prices dropped 7.4% in November, the largest decrease in nearly four years. Retail fuel prices have fallen in eight of the past nine weeks, according to a different government measure. Overall energy costs fell 4.1% in November.

When removing volatile food and energy costs, consumer prices rose 0.1% last month. That number reflects higher prices for shelter, transportation services and medical care.

Food costs rose 0.2%, the sixth consecutive monthly increase.

Year over year, consumer prices were up 1.8% and core prices were 1.9% higher.

The Federal Reserve targets a 2.0% annual inflation rate. Mostly mild inflation has allowed the central bank to keep interest rates near zero since late 2008 without the risk of stoking price spikes. Low interest rates are intended to stimulate growth.

A separate Labor report Friday showed Americans' real average weekly earnings increased 0.5%, the biggest rise since December 2008. Still, since reaching a peak in June 2012, real average weekly earnings have fallen 0.8%.

Meanwhile, U.S. industrial production jumped in November, mainly because of the resumption of activity at factories temporary idled by superstorm Sandy in late October. . . .

Overall industrial production, which includes manufacturing, mining, construction and utility output, increased 2.5% from a year earlier. . . .

Manufacturing has been a fairly consistent driver of the economic recovery, and that is expected to continue into next year. Manufacturing purchasers expect revenue gains in 2013 will outpace this year's improvement . . . ."

Summing Up

If energy prices remain under control or fall further, that will provide a much needed assist to the purchasing capability of our nation's consumers.

And as a further benefit, overall consumer price increases will stay below a 2% annual rate of increase as well.

In turn, that will allow the Fed to keep interest rates at historic lows until our economy gets its act together, thus providing a necessary boost to housing sales and related purchases.

Accordingly, declining energy prices are a very good thing in lots of ways.

So let's all keep pur fingers crossed and hope that gasoline prices keep falling to well below $3.00 per gallon in 2013.

That would be a great sign of better days ahead for both unemployment and our nation's economic growth.

Thanks. Bob.

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