On a seasonally adjusted basis, the CPI-U decreased 0.6 percent in November, its largest decline since a 0.9 drop in July 1949.
I will explain my skepticism below.
However, this number just does not make sense to me.
According to the Bureau of Economic Analysis, GDP started to increase in the first quarter of 2003. That's two and a half years of expansion. The BEA revised 3rd quarter GDP up to over 4%. And now inflation is dropping the most in over 50 years? A growing economy does not create any upward price pressure?
Several months ago, all of the regional economic reports from various Federal Reserve districts reported that input costs were increasing at very high rates. Now, two months later, costs drop the most in over 50 years.
According to the report, the prime reason for the drop was energy prices. Energy prices have dropped. But consider the following. The forward unleaded gasoline futures contract decreased to $1.45 in late November, but have since rallied to around $1.65. The forward natural gas contract traded between $12 and $13 dollars. The forward crude oil contract dropped from $60 to $57.5. In other words, none of the futures markets are showing a precipitous drop in prices.
The Federal Reserve has been raising interest rates for the last 13 months. Their primary reason for doing so was to contain inflation. This economic expansion is heavily dependant on cheap money. Now inflation - the primary reason for raising rates - drops the most in over 50 years?
The point of all this is I am very skeptical. It is always possible there are econometric reasons for the drop that explain it. While I understand statistics, I am far from an expert practitioner of the discipline.
However, this drop is just hard to swallow given the current condition of the economy. Simply put, economies growing at over 4% of GDP don't create an environment for prices to drop the most in over 50 years.