Record fall in US prices prompts deflation fears Heather Stewart Saturday November 10, 2001 The Guardian
A record fall in American factory gate prices prompted fears yesterday that September 11 has sent the US into a deflationary spiral. At the same time, the Japanese government blamed the knock-on effects of the attacks for what is expected to be the fastest contraction in that country's economy for 20 years. The 1.6% fall in the US producer price index last month was the sharpest since records began in 1947, as firms passed on falling energy costs and offered cut-price financing deals on cars to tempt consumers to keep spending. Analysts said falling prices left the Federal Reserve with room to make further interest cuts without sparking inflation. Anthony Karydakis, of Bank One, said: "There is no doubt that inflation is not an issue right now, and is not likely to be an issue for the foreseeable future." The fall in prices followed rises of 0.4% in both August and September, and even after stripping out volatile energy and food prices, there was a monthly decline of 0.5%. Fears that the economic downturn hitting the US will be reflected in other countries were confirmed, as the Japan ese economics minister, Heizo Takenaka, admitted that his government expects the country's economy to shrink by 0.9% in the year to March. The forecast contraction would be the largest for 20 years, and marked a sharp downward revision from Tokyo's previous prediction of 1.7% growth. "Economic conditions are very severe. External shocks hit Japan when the economy was weak," said Mr Takenaka. With interest rates already virtually at zero, economists said the Japanese government will be hoping the Fed's 10 interest rate cuts this year are enough to kick-start the US economy. "The Japanese economy is so dependent on US demand," said Graham Turner, of GFC Economics. "The best hope for Japan is that the global economy recovers." Some hope that American consumers may be shrugging off the gathering economic gloom came in news that consumer confidence, as measured by the University of Michigan survey, has unexpectedly risen this month, to 83.5, from 82.7 in October. Oscar Gonzalez, from John Hancock Financial Services, said: "In combination with the producer prices report earlier this morning, it's good news for consumers."
