(Updates with closing market quotes, paragraphs 6-8)
By Glenn Somerville
WASHINGTON Nov 19 U.S. consumer prices fell at
a record pace in October and new-home building slumped to fresh
lows, according to government reports on Wednesday that
suggested the economy likely is already in a recession that may
be long and deep.
A top Federal Reserve policy-maker played down risks that a
deflationary spiral was near but conceded that at least a half
year of economic contraction is likely. That would put put the
United States into recession with Japan and much of Europe.
"We have a very weak economy," Fed Vice-Chairman Donald
Kohn told reporters after a speech to a Washington think-tank.
"My most likely outcome is for a couple of quarters of negative
growth, and inflation coming down, but not getting to that
The Consumer Price Index plunged 1.0 percent in October,
its biggest drop since the Labor Department began monthly
records in 1947. Core prices, excluding food and energy items,
fell 0.1 percent -- the first fall in more than a quarter of a
century as prices for gasoline and all energy-related products
COMMODITIES SLIDE LOWER
"That decline seems to be due to the impact of the economic
downturn, particularly the weakness of consumption, and the
first pass-through effects of the commodity price slide," said
Paul Ashworth, senior U.S. economist for London-based Capital
The latest set of bad data depressed stock prices and sent
investors scurrying for safer-haven debt securities.
The Dow Jones industrial average .DJI lost 5.1 percent to
end at 7,997.28 while the Nasdaq Composite Index .IXIC slid
6.5 percent to 1,386.42.
Prices for 30-year U.S. Treasury bonds soared three full
points, and the yield fell to 3.94 percent, the lowest in more
than three weeks.
Collapsing commodity prices have driven earlier worries
about inflation to the back burner but fanned speculation about
potential for a deflationary spiral in which consumers stop
spending and companies restrict investment because they are
waiting to see how far prices drop.
Japan experienced a so-called "lost decade" in the 1990s
when its economy suffered under those circumstances, and the
Fed's Kohn said that mustn't happen. "I think that were we to
see this possibility, that we should be very aggressive with
our monetary policy, as aggressive as we can be," he said.
On Tuesday, Britain announced annual consumer inflation
fell for the first time in more than a year in October and at
the fastest pace since the series began. The U.K. Office for
National Statistics said inflation slowed to 4.5 percent in
October from 5.2 percent the previous month.
Long-standing problems in the housing sector, widely
considered to be at the heart of the U.S. economy's woes, were
further highlighted by a bleak Commerce Department report on
new-home starts in October.
HOME BUILDING ON THE SKIDS
Housing starts fell 4.5 percent last month to a seasonally
adjusted annual rate of 791,000 units and building permits --
which signal future building intentions -- dropped even more
dramatically by 12 percent to 708,000.
Another report from the Mortgage Bankers Association showed
applications for U.S. home mortgages fell last week, with loans
for purchases of single-family homes falling to their lowest in
nearly eight years, an industry group said. The lobby group's
mortgage application index fell 6.2 percent.
The Federal Reserve has already cut U.S. official interest
rates by 4.25 percentage points to 1.0 percent in 2008 to
combat the credit crisis and support the faltering economy.
Kohn said the U.S. central bank may have to consider more
"quantitative easing" by flooding markets with funds to try to
jump-start spending and investment.
The Labor Department said energy prices dropped 8.6 percent
in October, after declines of 3.1 percent in August and 1.9
percent in September. October's was the biggest drop since the
department began keeping seasonally adjusted energy prices in
Gasoline prices plunged 14.2 percent in October, also a
record drop. Gasoline prices are expected to drop again in
November, with the latest weekly government data showing retail
gasoline at $2.13 a gallon, sharply below the $3.54 a gallon at
the beginning of October.
New-vehicle prices dropped 0.5 percent last month after
falling 0.7 percent in September -- adding to the distress that
automakers feel as they plead for government money to tide them
over a period when they say buyers can't get loans to buy new
Food costs were up 0.3 percent in October, half the 0.6
percent rise posted in September.
On a year-over-year basis, the Consumer Price Index rose
3.7 percent, the smallest increase in a year.
(Reporting by Glenn Somerville, editing by Neil Stempleman)