Core Inflation Presents No Immediate Problem but Food and Energy Prices Remain Bothersome
The Consumer Price Index (CPI) rose 0.3% in October, after a similar increase in the prior month. The energy price index moved up 1.4% in October, following a 0.3% gain in September. Prices of gasoline (+1.4%) and household energy (+1.4% vs.0.1% in September) posted noticeable gains. The food price index rose 0.3% in October vs. a 0.5% gain in September. The 12.3% and 5.5% year-to-date gains in the energy and food price indexes, respectively, account for a large part of the 3.6% jump in the overall CPI in the first ten months of the year compared with a 2.6% increase in all of 2006.
The core CPI, which excludes food and energy, rose 0.2%, marking the fifth consecutive monthly increase of a similar magnitude. In the first ten months of the year, the core CPI has risen at an annual rate of 2.3% compared with a 2.6% increase in all of 2006. In October, shelter costs moved up 0.1% reflecting a 0.5% increase in rent and a 0.2% gain in owners’ equivalent rent. Apparel prices held steady, medical care costs were up 0.6%, and prices of new cars dropped 0.2%. Medical care costs show an escalation in past year, while shelter costs show a decelerating trend.
Conclusion – Overall inflation is trending up, with food and energy prices providing the extra boost. On this front, the Fed needs to be concerned. But, the muted trend of core inflation, which has ranged between 2.1% and 2.3% for seven consecutive months, is allowing the Fed to focus on credit issues and weak economic growth. The favorable core inflation trend could spike up before weak consumer demand holds back inflation. Until then, the FOMC has prospects of weak economic growth, a troubled dollar, and a threat of inflation to juggle with. We are keeping close tabs on the message from economic reports between now and the FOMC meeting on December 11. The latest jobless claims report, the NFIB Small Business Optimism Index, and the six-months-ahead Business Outlook Index of the Federal Reserve Bank of Philadelphia point to a bearish outlook for the economy. The risks today are tilted toward weak economic conditions. But sluggish growth for the fourth quarter already is built into the FOMC’s forecast. The FOMC believes that the bulk of the effects of its cumulative 75 basis point cut in the fed funds rate will not start to be reflected in the economic data until 2008. Therefore, the FOMC is likely to keep its fed funds rate target steady at the December 11 meeting unless incoming data suggest that the economy has entered a recession.
Jobless Claims Warn of Weakness in Hiring
Initial jobless claims rose 20,000 to 339,000 during the week ended November 10. The four-week moving average is 330,000, the highest since March 3, 2007. The upward trend of initial jobless claims (see chart 3) points to significant weak demand for labor. Continuing claims, which lag initial claims by one week, fell 7,000 to 2.568 million and the insured unemployment rate held steady at 1.9%.
