Consumer Price Index: October 2008

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.