WASHINGTON — A growing fear of economic deflation helped take the air out of the stock market Wednesday, and another white-knuckle final hour on Wall Street pushed the Dow Jones industrials under 8,000 to their lowest close since the financial meltdown began.
Consumer prices in October took their biggest monthly plunge in the six decades that records have been kept — a reprieve for shoppers but a danger sign for the economy, because falling prices can make a mild recession spiral into something worse.
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The drop illustrated once again how quickly the economic danger can shift in tumultuous times like these.
"Consumer price inflation has suddenly screeched into reverse," said Brian Bethune, economist at IHS Global Insight. "The inflation threat has disappeared from the radar screen."
Falling prices might sound like a gift at first. But a prolonged, widespread decline would do serious economic damage, dragging down incomes, clobbering home prices even more, and shrinking corporate profits.
The consumer price index, the country's most closely watched inflation barometer, dropped 1 percent in October, the biggest monthly decline since the government started keeping records in 1947. Many analysts expect another drop for November.
That's a stunning reversal from as recently as June, when consumer prices spiked 1.1 percent, the second-fastest pace in a quarter-century.
Worries ran so high then that the Federal Reserve in late June halted its rate-cutting campaign to shore up the ailing economy. Fed Chairman Ben Bernanke and his colleagues fretted that lowering rates further would worsen inflation.
The Fed stayed on the sidelines until Oct. 8, when it joined other major central banks and slashed interest rates in a global effort to limit the damage from the staggering financial system.
On Wednesday, the Fed sharply lowered its economic projections and signaled that further interest-rate cuts might be necessary to ease the economy's worst crisis since the Great Depression.
The news, coupled with other reports, pushed the Dow under 8,000 in the last minutes before the closing bell. It closed down 427 points, or about 5 percent, at 7,997 — its lowest close since March 2003. The average had dipped below 8,000 on other days since the meltdown began in mid-September but had not closed there.
Documents from the Fed's most recent closed-door deliberations on interest rate policy showed a worry about "significant weakness" in the economy and a worsening job market.
After those deliberations, on Oct. 29, the Fed lowered the benchmark interest rate to 1 percent, a level seen once before in the past half-century. Many economists think the Fed will go even lower when it meets Dec. 16.
At the same time, though, the documents showed the Fed was worried about the effectiveness of previous rate cuts and had doubts about whether more cuts would help much.
Japan was gripped with a period of deflation during the 1990s, and it took a decade for that country to overcome those problems. America's last serious case of deflation was during the Depression in the 1930s. Most economists think chances are slim that the country will tip into such a spiral, but they aren't ruling it out.
And falling prices might not help even on the shopping side. "Consumers would wait to buy because they would keep waiting for prices to go lower," said Rebecca Braeu, economist at John Hancock Financial Services. "That would curtail consumer spending."