November 17, 2010

CPI Barely Rose in October; Lowest Yearly Gain on Record

Core consumer prices rose only 0.6% in year for smallest gain since 1957

Stoking U.S. market fears of deflation, core consumer prices saw their smallest 12-month increase, rising only 0.6% over the last year, posting their smallest gain since the Labor Department started keeping records in 1957, according to data released Wednesday.

The consumer price index (CPI) increased just 0.2% in October on a seasonally adjusted basis, the Bureau of Labor Statistics (BLS) reported. Over the last 12 months, the all-items index increased 1.2% before seasonal adjustment.

The monthly and annual core rates both posted a tenth lower than economists had expected.

“The index for all items less food and energy was unchanged in October, the third month in a row with no change. The indexes for shelter and medical care rose, but these increases were offset by declines in an array of indexes including new vehicles, used cars and trucks, apparel, recreation and tobacco,” the BLS said in its news release.

As has frequently been the case in recent months, an increase in the energy index was the major factor contributing to the overall rise in CPI. The gasoline index rose for the fourth month in a row, accounting for almost 90% of the all-items increase, and the household energy index rose as well. The food index rose slightly in October, and rents rose a tenth.

“The nature of U.S. disinflation is changing, with rents now creeping higher because vacancy rates are falling, while the rest of the core slows at a faster rate,” said Ian Shepherdson, chief U.S. economist for High Frequency Economics Ltd., in Valhalla, New York, in an analyst note. “We cannot be at all confident that core inflation will not reach zero or even go negative, and neither can the Federal Reserve; hence the resumption of quantitative easing.”

Similarly, the growth path for U.S. gross domestic product (GDP) “is neither here nor there,” said Erik Weisman, an investment officer with Boston-based MFS Investment Management, at a 2011 outlook presentation on Tuesday in Manhattan. Both CPI and GDP growth are often linked to the rate of inflation.

Since 1975, GDP has typically indicated a V-shaped recovery that brings the economy bouncing back in a big way at a growth rate of anywhere from 6% to almost 14%, Weisman said. This time around, though, the U.S. economy is treading water and looks likely to keep barely afloat at a rate of 3% GDP growth in 2011.

Read about last month’s CPI at AdvisorOne.com.

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