Price of Goods Stalls, Could Spell Trouble

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The Consumer Price Index rose a moderate .2% in October, almost entirely due to an increase in gas prices, the Labor Department said Wednesday.

The gasoline index increased for the fourth month in a row and accounted for almost 90% of the slight increase in the CPI. The cost of housing rose by 0.1% last month, the first increase since July and only the second this year, and energy prices and food prices also rose slightly.

Once you exclude the traditionally volatile food and energy prices though, the core index registers no change for the third straight month, signaling that the rate of inflation is stagnant. During the past 12 months, core prices of goods – which includes cars, clothing and travel accommodations – have risen by only 0.6%, the smallest annual rise since the index began in 1957.

The flat prices can be attributed to the weak economy, as consumers curb spending while unemployment remains high. The latest number gives credence to the argument put forth by many economists that inflation, the rise in cost of goods and services in an economy over time, is too low.

As reported, many economists warn that the U.S. could actually fall into deflation, a persistent decline in prices across the board. While this may sound favorable to the masses, falling prices can actually hurt an already shaky economy by actually discouraging spending as consumers wait for prices to fall even lower.

The resulting decrease in profits causes companies to lay off workers, who in turn spend less, creating a cycle. Additionally, deflation erodes the value of homes and other assets and makes it harder for people to pay off debts.

Deflation concerns have led the Federal Reserve to take active steps to bolster the economy. Earlier this month, the Fed said it would buy $600 billion in Treasury bonds in an attempt to lower interest rates and spur borrowing and spending.

You can check out this MainStreet article to find out more about what the Fed thinks of deflation.

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