America is rediscovering its puritanical roots.

The Consumer Price Index’s 1% drop in a single month grabs headlines, but nine-tenths of that relates to falling food and energy prices. More worrying is the 0.1% drop in the core index, with shopaholic fixes like clothing, hotel stays and vehicles all falling. Airline fares decreased by 4.8%, despite large cuts to capacity.

For now, annual inflation, while down sharply from September’s 4.9%, is still positive at 3.7%. Energy and food will continue to have a big impact. Adjusting their respective weights in the basket for price moves this year, a return of these key items back to October 2007 levels would take another 1.8% off.

The risk of wider deflation is now unmistakable. The American consumer — roughly 70% of the domestic economy — is switching away from asset-fueled sprees to living on regular income. Consumer borrowing is down 1.5% year-on-year, a pace of decline last seen in the early 1990s recession.

The big question is how quickly shoppers can be lured back to the malls. So far, rapid monetary easing hasn’t worked. Neither the tax rebates sent out earlier this year nor the implied stimulus of lower gasoline prices — worth an annualized $283 billion based on the decline since July’s peak — has had a radical effect.

David Rosenberg, Merrill Lynch’s North American economist, reckons annual CPI could hit 0% within a year, as commodity prices fall, but also as rising unemployment erodes spending power further. Official lending rates, already near zero, will likely fall further. But with the consumer recession still in its infancy, the case for a big expansion in fiscal-stimulus programs is strengthening by the day.
By Liam Denning
OF THE WALL STREET JOURNAL