The steepest plunge in American consumer prices for more than 60 years fuelled feverish speculation yesterday over the danger that the United States and the West’s other big economies could slide into the grip of deflation.

Prices for goods and services across the US economy tumbled by 1 per cent in October, in the sharpest monthly decline since February 1947, official figures showed. The fall, twice as large as economists expected, drastically cut the annual inflation rate, to 3.7 per cent for last month, from 4.9 per cent in September, and a 17-year high of 5.6 per cent during the summer.

The news further increased the scope for the US Federal Reserve to cut interest rates again next month from their present low of just 1 per cent, a level seen only once before in the past half-century.

Expectations that the Fed will lower rates again at its final meeting of the year on December 16 were reinforced after it last night cut its forecasts for the American economy and signalled that it is ready to take more action to shore up activity.

In its latest projections, the Fed estimated that the US economy was likely to stagnate in 2009, or grow by at best 0.3 per cent. A range of forecasts from Fed officials projected that gross domestic product could shrink next year by between 0.2 and a dire 1.1 per cent. That compares with June forecasts for growth of between 2.0 and 2.8 per cent in 2009. The Fed also now expects US unemployment to climb to between 7.1 and 7.6 per cent next year.

The abrupt decline in inflationary pressures in the world’s largest economy was driven by the plummeting costs of petrol and other fuels, with prices at the pump for America’s motorists dropping by 14 per cent over the past month.

However, there were widespread and steep falls in prices for other goods and services, too, reinforcing economists’ belief that American inflation is set to drop to historic lows as recession undercuts consumer demand.

In other falls reported yesterday, clothing prices dropped by 1 per cent last month, vehicle prices by 0.7 per cent and rates for hotel rooms by 1.6 per cent. Fares charged by transport groups were down by 3.3 per cent as airlines moved to abandon fuel surcharges to tempt back reluctant passengers.

As a result, so-called core consumer prices, excluding the volatile cost of foodstuffs and fuel, fell by 0.1 per cent last month, registering their first fall for more than a quarter of a century and adding to the picture of mounting deflationary pressure.

Paul Ashworth, of Capital Economics, the consultancy, noted that for the main items of consumer spending only food prices really registered significant rises last month, increasing by 0.3 per cent. But he said that a recent collapse in the cost of raw produce, such as wheat and corn, meant that food prices generally were also soon set to begin falling.

Other economists predicted further, extensive price declines as retailers and companies providing consumer services struggle to tempt Americans, battered by rising unemployment and a deepening downturn, to continue spending.

Mr Ashworth said that it seemed clear that headline US inflation would inevitably slip into negative territory next year.

Most economists still believe that the peril of a prolonged bout of full-blown deflation, which would mean prices falling across the economy on a sustained basis, will still be avoided.

However, Mr Ashworth said that while he previously had agreed with this assessment, yesterday’s figures had led him to question it, and to worry about the threat of “debt deflation”, where an economy is undercut as falling prices and incomes increase the real value of debts.

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