Inflation Turning Corner; Factory Output Rises

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October CPI Up 0.2%

By Lucia Mutikani

WASHINGTON -- Consumer prices increased in October after two straight months of declines as the cost of health care and other services rose, evidence of firming inflation that further supports views that the Federal Reserve will raise interest rates next month.

The economic outlook also got a boost from other data Tuesday showing a fairly solid increase in manufacturing output in October after dropping for two consecutive months.

%VIRTUAL-pullquote-There is nothing that derails a December Fed rate hike in today's data.%"There is nothing that derails a December Fed rate hike in today's data. Inflation is starting to turn a corner and manufacturing production remains resilient," said Thomas Costerg, an economist at Standard Chartered Bank in New York.

The Labor Department said Tuesday its Consumer Price Index rose 0.2 percent last month, reversing September's 0.2 percent drop. In the 12 months through October, the CPI advanced 0.2 percent after being unchanged in September.

Signs of stabilization in prices after a recent downward spiral are likely to be welcomed by Fed officials and give them some confidence that inflation will gradually move toward the central bank's 2 percent target.

Inflation has persistently run below target. In the wake of a robust October employment report, the U.S. central bank is expected to raise its benchmark overnight interest rate from near zero at its Dec. 15-16 meeting.

There is hope tightening labor market conditions, characterized by a jobless rate now in a range that some Fed officials view as consistent with full employment, will put upward pressure on wages and drive inflation toward its target.

A report from the Fed showed manufacturing production increased 0.4 percent as the output of both long-lasting and nondurable goods rose.

Manufacturing, which accounts for 12 percent of the U.S. economy, declined in both August and September. The sector has been hobbled by a strong dollar, spending cuts by energy firms and efforts by businesses to reduce an inventory bloat.

However, further declines in mining output and a weather-related drop in utilities production weighed on overall industrial production last month.

Still, the increase in manufacturing output was another indication that economic growth would accelerate in the fourth quarter after braking to a 1.5 percent annual rate in the July-September quarter.

Abating Headwinds

"The healthy rise in manufacturing sector production is a welcome sign that the headwinds to this sector are beginning to ease," said Millan Mulraine, deputy chief economist at TD Securities in New York. "The outlook for the industrial sector is becoming incrementally more favorable."

The dollar was trading higher against a basket of currencies, while prices for U.S. Treasuries fell. U.S. interest rate futures implied a 70 percent chance of a December rate hike, up from 68 percent on Monday, according to CME Group's FedWatch. Stocks on Wall Street rose, boosted by better-than-expected earnings from Walmart (WMT) and Home Depot (HD).

In October, the so-called core CPI, which strips out food and energy costs, gained 0.2 percent after a similar rise the prior month. Rents and medical costs accounted for much of the increase in the core CPI last month.

The rental index increased 0.3 percent after rising 0.4 percent in September. Medical care costs rose 0.7 percent, the largest increase since April.

In the 12 months through October, the core CPI increased 1.9 percent after rising by the same margin in September.

The Fed tracks the personal consumption expenditures price index, excluding food and energy, which is running below the core CPI. The dollar's 18 percent rise against the currencies of the United States' main trading partners since June 2014, has made imports such as apparel and automobiles less expensive.

Inflation should get a boost next year as the weak readings from late 2014 and this year drop out of the calculation.

Energy prices, including gasoline and electricity, rose last month. While food prices rose marginally, four of the six major grocery store food group indexes increased, with cereals and bakery products posting the largest increase since August 2011.

Hospital costs increased 2 percent in October and airline fares rose 1.5 percent, ending a string of three consecutive declines. There were also increases in recreation costs, but apparel prices recorded their biggest decline since December. Prices for used cars and trucks fell for a sixth straight month.

9 Numbers That'll Tell You How the Economy's Really Doing
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Inflation Turning Corner; Factory Output Rises
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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