US consumer prices in record fall

US energy prices fell 8.6% in October

US consumer prices dropped by a record 1% in October compared with the previous month, as fuel costs fell for a third month in a row.

The news sent Wall Street down more than 5%, while European markets closed with losses of more than 4%.

The reduction in consumer prices was the biggest monthly drop in 61 years and also reflected a significant decline in energy prices.

This bigger-than-expected fall is being seen as a sign of US economic weakness.

The consumer prices figures have raised investors' fears of an impending recession.

Cheaper borrowing

Over the past 12 months, consumer prices have risen by 3.7%, which is substantially lower than the 5.6% figure for a 12-monthly rise set this summer.

Economists say that this rapid fall in consumer prices is giving the US Federal Reserve the room it needs to cut interest rates to battle the economic slump.

Sacha Tihanyi at Scotia Capital said the latest inflation data "may be giving investors a little bit of confidence the Fed won't feel constrained in dropping rates even further".

The central bank is expected to cut its key federal funds rate to 0.5% in December.

The Federal Reserve cut rates twice during October, taking its key interest rate down to 1%.

"This report clearly reflects the crunch in discretionary consumers' spending which is likely to persist for the foreseeable future," said Ian Shepherdson of High Frequency Economics.

"Looking ahead, the question is will the economy rebound enough with the benefit of a big stimulus plan in 2009 to prevent deflation and get consumers spending again," said Michael Sheldon at RDM Financial.

'Fighting recession'

Separate figures showed that new home starts fell to a record low last month.

Commerce Department statistics said new-home starts fell 4.5% in October to an annual pace of 791,000 units, the lowest on record.

Building permits, which are seen as a measure of future projects, dropped 12% to an annual rate of 708,000.

Energy prices fell by a record 8.6% in October after smaller drops in the previous two months.

Fuel prices plummeted 14.2%, the biggest drop on record. Food prices rose by 0.3%.

On Tuesday it was reported that US wholesale prices dropped by 2.8% in October, the biggest one-month decline since records began more than 60 years ago.

Many forecasters think that the US economy is already in recession. It has already had one quarter of negative growth.

David Wyss at Standard & Poor's thinks that the latest inflation data is good news for the Fed, "because it says they don't have to worry about inflation, they can concentrate on fighting recession".