CPI Showed Inflation Flat in September, but Consumers not Buying

Economic data released Friday showed that consumer prices were flat in September, but the low rate of inflation was not enough to boost consumer sentiment.

The September figures for the consumer price index (CPI), released on Friday, showed that inflation has slowed beyond expectations, as the CPI rose a scant 0.1%, seasonally adjusted.

Also released on Friday, the Thomson Reuters/University of Michigan survey of consumer sentiment disappointed predictions by coming in at a preliminary level of 67.9, down from 68.2. It had been expected to rise to 69.0 by economists polled by Reuters. Consumer expectations were at 64.6, which, although down from June's level of 69.8, showed a substantial increase over September's 60.9.

Stripping out food and energy, the CPI index was unchanged from August; however, the food index rose 1.4%, for both food at home and food away from home, and gasoline pushed the rise in the energy index, at 5.1% (energy rose 3.8% over the last year).

Some categories, including apparel, used vehicles, recreation, and household furnishings and operations, dropped during September, which offset a substantial increase in medical care (0.3% for medical care commodities and 0.8% for medical care services), and a slight increase for new vehicles (0.1%).

How Consumers Feel

Consumers' buying plans are low, said Reuters-Michigan consumer sentiment survey director Richard Curtain in a statement.

"Personal financial expectations were near their all-time low, and the steep decline in buying plans was related to uncertainty about consumers' future income prospects," Curtain said.

Since consumer spending makes up approximately two-thirds of U.S. economic activity and many retailers rely on the period before the holidays to make it through the year, spending is a closely watched indicator. On the positive side, the consumer 12-month economic outlook was up by 9 points, coming in at 70.

New York State of Mind

Conditions improved for New York State manufacturers in October, and so did optimism; according to the Empire State Manufacturing Survey, released Friday. The general business conditions index increased by 12 points to 15.7. New orders and shipments indexes also showed improvement, coming in well above their September levels, according to the survey; the inventories index dropped below zero and has not been that low since January.

Hiring was also up, gaining 10 points, and respondents were more hopeful, with the future general business conditions index gaining 9 points. Credit availability was essentially unchanged, with 14% reporting a tightening and 5% some easing. "These results are not substantially different from those of the March 2010 survey, which had asked the same questions," according to the report.

While the Commerce Department's August business inventories numbers were not quite so rosy, coming in at a slight rise of 0.6% from July for inventories and only a 0.1% increase in sales from July, perhaps the preliminary October figures from New York may indicate a broader trend of optimism.

Economists' Views

Steve Blitz, senior economist at Majestic Research, had this to say about the retail sales data: "Decent numbers across the board, save for spending at department stores and apparel retailers, which ran counter to industry reports. Seasonal factors may have played a role here and it would be no surprise if September sales are revised higher."

Blitz said that the data and some early October readings indicate a "new normal for consumers—buying when they have to and not buying when they don't. Income and employment are up enough and the fear of job loss (more important) has diminished enough, to give consumers confidence to buy at value prices for Easter, back-to-school, and the upcoming holidays; just not in between."

Robert Dye, senior economist at PNC's economics division, said Thursday's producer price index (PPI) release showed some building price pressure at the producer level, but flat prices at the consumer level were seen with Friday's CPI data. Combined, the data suggest "a price squeeze in downstream companies that could impair profitability," Dye said in a statement.

Retail sales for September, he pointed out, came in better than expected.

"It now looks like the back-to-school season was at least moderately successful for major retailers, setting up a holiday shopping season that will also see moderate gains," Dye said. "Household balance sheets remain under stress due to high unemployment, low rates of job creation and asset price erosion but shoppers will persevere. Retailers face some uncertainty with inventory control in the months ahead."

Joyce Hanson contributed to this story.