U.S. Consumer Price Index (CPI) Largest Decline Since 1947

By: Joseph_Brusuelas

The October estimate of consumer price index declined -1.0% (-0.961%) m/m and was up 3.7% y/y. The core ex-food and energy estimate fell -0.1%(-0.071%) m/m and is up 2.2%. The ex-food estimate saw a sharp drop of -1.2% m/m and the ex-energy component was flat for the month. Energy prices dropped -8.6% and prices in the services sector were also flat for the month.

Inside the data, the housing component, which comprises 42.4% of the overall index was flat and the owners equivalent rent subcomponent was up 0.1%. The cost of transportation was down -5.4%. The cost of food rose 0.3%, apparel declined -1.0% , gasoline -14.2% and commodities were down -2.3% The cost of medical care increased 0.2% and education 0.2%.

The decline in the cost of transportation and gasoline were the primary catalysts behind the single largest decline in consumer prices since the creation of the index in 1947. The second straight record low recorded in the October inflation data confirms that the risk to the economy from pricing has rapidly moved from that of rapid inflation to the disinflation that is now moving through the system.

The core rate of inflation is quickly converging on the Fed's implied target zone of 1-2%. While at this point it does not appear that a general breakout of deflation is in the cards, the Fed would be wise to employ a potent communications policy with respect to the implied target rate as a way to shape market expectations during its experiment with the quantitative easing policy currently underway and the probability of a extended period of falling prices in many sectors of the economy.

By Joseph Brusuelas
Chief Economist, VP Global Strategy of the Merk Hard Currency Fund

Bridging academic rigor and communications, Joe Brusuelas provides the Merk team with significant experience in advanced research and analysis of macro-economic factors, as well as in identifying how economic trends impact investors.  As Chief Economist and Global Strategist, he is responsible for heading Merk research and analysis and communicating the Merk Perspective to the markets.

Mr. Brusuelas holds an M.A and a B.A. in Political Science from San Diego State and is a PhD candidate at the University of Southern California, Los Angeles.

Before joining Merk, Mr. Brusuelas was the chief US Economist at IDEAglobal in New York.  Before that he spent 8 years in academia as a researcher and lecturer covering themes spanning macro- and microeconomics, money, banking and financial markets.  In addition, he has worked at Citibank/Salomon Smith Barney, First Fidelity Bank and Great Western Investment Management.

© 2008 Merk Investments® LLC
The Merk Hard Currency Fund is managed by Merk Investments, an investment advisory firm that invests with discipline and long-term focus while adapting to changing environments. Axel Merk, president of Merk Investments, makes all investment decisions for the Merk Hard Currency Fund. Mr. Merk founded Merk Investments AG in Switzerland in 1994; in 2001, he relocated the business to the US where all investment advisory activities are conducted by Merk Investments LLC, a SEC-registered investment adviser.

Merk Investments has since pursued a macro-economic approach to investing, with substantial gold and hard currency exposure.

Merk Investments is making the Merk Hard Currency Fund available to retail investors to allow them to diversify their portfolios and, through the fund, invest in a basket of har

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