US CONSUMER prices plunged at a record rate for a second straight month during November, according to a government report that is likely to fan fears that economic recession is rapidly heightening risks of deflation.
In Britain, Bank of England governor Mervyn King said the outlook for the British economy has worsened in recent weeks and there was a substantial risk that inflation could fall below 1 per cent next year.
This followed the publication of official data showed British inflation fell to 4.1 per cent in November from 4.5 per cent, still more than double the central bank's target and requiring Mr King to explain why to the government in an open letter.
The US Labor Department said its closely watched Consumer Price Index dropped 1.7 per cent after falling 1 per cent in October - back-to-back record drops since the department started keeping monthly data in 1947. Core prices that exclude food and energy items were flat in November after declining 0.1 per cent in October.
On a year-over-year basis, consumer prices were up 1.1 per cent after a 3.7 per cent increase in October. It was the smallest rise since mid-2002.
Energy prices plummeted 17 per cent last month, double the 8.6 per cent fall in October. It was the largest monthly decrease in energy prices since the department started monthly records in 1957.
With jobs disappearing at an accelerating rate and the economy now in a year-old recession, consumers have cut back on many purchases and a lengthy period of weakness is anticipated by many economists.
Food prices in November were up a relatively slight 0.2 per cent after a 0.3 per cent October rise. It was the smallest monthly gain in food costs since March.
In his letter, Mr King said a cut in UK sales tax, falling commodity prices and a weak economy would force inflation sharply lower soon and it was quite possible he would soon have to explain why inflation was so far below target.
The slide in the pound and falling market interest rates would, however, provide support to both the economy and inflation, he added.
His comments reinforced market expectations that the Bank of England will deliver more aggressive interest rate cuts in the coming months, having slashed rates by 3 percentage points to 2 per cent since October.
"Our forecast remains that the UK bank rate will fall below 1.0 per cent in the second quarter of next year," said Philip Shaw, chief economist at Investec.
- (Reuters)
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