Energy Prices Push CPI Lower in October
With the federal government partially shut down during the first half of October, BLS field workers were furloughed during part of the normal collection period, leading to a smaller sample in October. In today's release, the BLS noted that the October sample of prices was roughly 75 percent of its normal size. We, however, did not note anything suspicious in today's report, and the trend remains a weak pace of price growth.
Consumer prices fell 0.1 percent in October, which was slightly weaker than the expectation for no change over the month. Gasoline prices were the largest source of downward pressure, falling 2.9 percent. Natural gas prices fell 1.0 percent, the fourth decline in five months, while electricity costs ticked up for the second consecutive month. Over the past year, energy prices have fallen 4.8 percent, and have helped to keep overall inflation low. On a year-over-year basis, the CPI has risen only 1.0 percent - the smallest 12-month change since October 2009.
Food prices have also leant little upward pressure to inflation over the past year. In October, prices were little changed, with increases for meats, fruits & vegetables and nonalcoholic beverages offsetting declining prices for dairy, cereal and bakery products. Heading into the Thanksgiving shopping week, prices for poultry including turkey are up 1.7 percent from last October, which is more than double the rise in prices for all food at home.
Core Continues to Reflect Only Modest Inflation Pressure
Excluding energy and food, prices rose in line with recent months' gains, increasing 0.1 percent. Shelter costs continued to propel the core index higher, but the 0.1 percent increase was the smallest monthly gain since last December. Transportation services rose 0.7 percent on higher airfare and vehicle insurance, while used car and trucks ticked up 0.3 percent. A drop in apparel, new vehicles and medical services tempered the gain.
Inflation Outlook Still No Threat to Monetary Policy
Labor market weakness, evidenced by the headline rate of unemployment at 7.3 percent despite the plunge in participation over the past five years, has been a key factor in keeping inflation low. Inflation is likely to maintain its modest pace over the current quarter before strengthening a bit in 2014 as wages and broader demand improve. We expect both the CPI headline and core indexes to increase 1.9 percent next year. This remains well within the Fed's comfort zone and therefore will allow the FOMC to continue to focus on the employment side of its mandate. Our expectation is for the Fed to continue its current pace of asset purchases at least through the March 19 meeting. Even after tapering begins, Fed officials, including Chairman Bernanke yesterday at the National Economics Club, stress that the Committee is unlikely to raise the fed funds target rate for some time.
