U.S. core consumer prices drop for first time in 27 years

cpi drops for first time in 27 yearsThose concerned that the ultra-cheap money brought about by rock-bottom rates at the Fed could lead to rampant inflation can hyperventilate a little less after today's report that core consumer prices actually dropped for the first time in 27 years in January, down 0.1%.

After including fuel and food, which are more erratic, the U.S. Dept. of Labor's Consumer Price Index (CPI) for All Urban Consumers still went up only a modest seasonally-adjusted 0.2%. This translates into a yearly rate of 2.6%, not adjusted for seasonality.To calculate the core consumer price, food and energy are not included. By removing these volatile consumer expenses, the numbers provide a better comparison over time of the consumer's buying power.

In January, the food index was up 0.2%. The energy index was up 2.8%, which continued a nine-month string of climbing prices. Unlike the core consumer prices, the energy index has been troublesome in the past 12 months, up 19.1% in that period.

You'll be most likely to experience core price stability if you bought a new car, house or airline ticket, while you might be thinking whaaaaaa? if you had to pay medical bills or buy a used car, two sectors that weren't price-dormant. Used car prices have climbed steadily since last summer, thanks in part to Cash for Clunkers, and during the past 12 months, medical care costs have crept up 3.5%.

Despite the modest inflation figures, the Fed just raised its discount rate by 0.25%. The stock market isn't digging the new rate, apparently, if the tumble in foreign stock exchanges afterward is any indication. The wisdom of short-term sacrifice for long-term stability isn't strongly reflected in the stock market.

What does this mean to you? The good news -- stable prices and a strong dollar. The bad news -- if you counted on inflation to reduce the burden of a long-term loan such as a 30-year mortgage, your prospects are not looking so good at the moment.

And energy costs could be the cement bucket in which our feet are trapped.
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