Inflation continues to show mixed signaled in the United States, even after the PPI showed yesterday that inflationary pressures are easing, yet today’s CPI figures signaled that inflation might start to cause some problems amid rising energy prices; in addition to the recent increase in economic activity. Meanwhile, data from the housing market disappointed after failing to meet expectations, which signals that there’s still a long way to go before the recovery fully materializes.

The consumer price index rose in October by 0.3%, more than median estimates of 0.2%, which was also the prior reported rise back in September; compared with a year earlier, CPI dropped by 0.2% only following the prior reported drop of 1.3% and slightly above median estimates of 0.3%.

Moreover, core CPI which excludes prices of food and energy rose in October by 0.2%, inline with the prior reported estimate and slightly above than median estimates of 0.1%; while compared with a year earlier, core CPI rose to 1.7% from the prior reported rise of 1.5% and also above median estimates of 1.6%.

The rise in October prices was attributed to the rise in vehicles and gasoline prices, since prices rose by 1.7% and 1.6% respectively, while transportation contributed the most to the reported rise, food prices rose by 0.1% following the prior reported drop of 0.1% back in September, while energy prices rose by 1.5% in October.

The recent rise in energy prices, especially gasoline prices, have been fueling prices recently, as oil prices have been rising over the past few months on the back of a weak U.S. dollar, as well as the recent increase in economic activity, which provided hope for investors that demand for energy might start to rise soon.

However, it’s rather soon to judge that the U.S. economy will be able to shake off the worst recession since the Great Depression, since activity is still stabilizing in nearly all sectors, and recovery is well expected to continue through into next year, where rising unemployment and tightened credit conditions continue to weigh down on economic activity.

However, the outlook for inflation remains somehow unclear, as the Federal Reserve Bank expects the ongoing economic slack to continue weighing down on prices, accordingly the Feds believe that inflation will remain subdued for some time; however, given the recent increase in energy prices, in addition to the huge increase in money supply, we should expect upside risks to inflation to rise heavily over the medium to long terms.

The Feds pumped huge amounts of money into the financial system in order to help facilitate lending and ease credit conditions, but since credit conditions are still tight this increase was not reflected yet on prices; since the velocity of money is still rather weak. Once economic activity starts to pick up, we should expect inflation to rise drastically, unless the Feds have a plan that can withdraw excess liquidity effectively from the financial system.

Moreover, the U.S. released the housing starts and the building permits for the month of October today; housing starts dropped to  529,000 from the prior revised estimate of 592K and well below median estimates of 600,000; while building permits dropped as well to 552,000 from the prior revised estimate of 575,000 and also below median estimates of 580K.

The housing market continues to show mixed signals, where activity seemingly hasn’t fully recovered yet, though the housing market seems to have reached its bottom amid the worst housing crisis since the Great Depression. Yet it will probably take some time before we start to see a strong rebound in housing market activity, although the government extended the tax credit for first time for buyers, but the housing market will still probably continue to stabilize well into next year.

The U.S. economy is still facing huge challenges ahead, and the most important one is elevated unemployment levels; unemployment now is standing at a 26-year high at 10.2% and will probably continue to rise over the upcoming few months, accordingly we should expect the economy to remain under pressure, although economic growth will prevail. The pace of this growth won’t be as strong, since the U.S. economy is yet to return to its long term growth potentials…