The cost of living in America fell at its fastest rate for more than 60 years in October providing new evidence that the world's biggest economy is plunging headlong into a severe recession.

Consumer prices dropped by 1 per cent last month, pulled down by the collapse in the price of oil. Wall Street expected a 0.5 percentage drop and now analysts say November's fall could be even bigger. In October, US fuel prices dropped 14.2 per cent.

Consumer spending is critical to the American economy, accounting for two thirds of growth and such a large spending cut is affecting demand for goods such as new cars, clothing, and white goods.

US stocks plunged to the lowest in five and a half years as investors girded for a lengthy economic downturn and US auto executives predicted a far-reaching calamity without a government lifeline.The Dow Jones industrial average plunged 426.99points, or 5.07 per cent, to close at 7,997.76. The Standard & Poor’s 500 Index fell 52.18 points, or 6.07 per cent, to 806.94. The Nasdaq Composite Index tanked 96.85 points, or 6.53 per cent, at 1,386.42.

The fall in inflation may offer a little comfort to Americans, growing increasingly fearful of joining the 510,000 workers losing their jobs each week amid the struggle to get credit.

However, the figures validate measures taken during the last few months by Ben Bernanke, the chairman of the US Federal Reserve, to drastically slash interest rates. Until the banking crisis gathered pace three months ago, Mr Bernanke had been nervous that cutting interest rates too rapidly could fuel inflation.

The slide in consumer prices will also endorse a widely expected interest rate cut on December 16 which Wall Street anticipates will see the cost of borrowing fall from 1per cent to 0.5 per cent.

At the same time, new figures showed that the number of new homes built in the US fell for the fourth month in a row. October's drop was 4.5 per cent to 791,000. Even taking the slide in new homes built into account, America's residential property market is still clogged with more than a year's supply of unsold houses.

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