Slight September consumer price increase points to low inflation

Once again in September, a few morsels for the inflation hawks, but not much more because inflation remains tame. Consumer prices rose 0.2 percent in the month, the U.S. Labor Department announced Thursday, as energy prices and medical costs offset a decline in housing costs.

Further, the core rate -- which excludes the often-volatile food and energy component -- also rose 0.2 percent. Economists surveyed by Bloomberg News had expected consumer prices to increase 0.1 percent in September, and the core rate to rise 0.1 percent. Consumer prices rose 0.4 in August, were unchanged in July, and increased 0.7 percent and 0.1 percent in June and May, respectively.

What's more, the U.S. economy over the past year still shows little sign of inflation: Consumer prices have actually declined 1.3 percent in the past 12 months.
Also, the 12-month core rate -- one metric the U.S. Federal Reserve watches closely for signs of rising long-term inflation -- has risen just 1.5 percent, or well within the Fed's "comfort zone" for inflation.

In September, overall energy prices rose 0.6 percent, gasoline prices were up 1.0 percent, fuel oil rose 1.5 percent, new car prices increased 0.3 percent, apparel climbed 0.1 percent, medical services jumped 0.4 percent, shelter prices were flat, utility prices fell 1.7 percent, and food prices decreased 0.3 percent.

Most economists don't expect inflation to rise in the months ahead. They say the recession that has idled factory production and resulted in more than 7.2 million layoffs. That excess capacity in the commercial sector and slack in the labor force will limit price/wage increases.

Also working against inflation: the reluctance by foreign manufacturers that export goods to the U.S. to raise prices amid intense competition. Many refuse to raise prices despite cost increases, for fear of being priced out the lucrative U.S. market.

Further, while some discussion has risen in Washington and Wall Street circles about whether to take back part of the $786 billion stimulus, it's unlikely Congress will act to do that while so few jobs are being created and inflation remains low.

Economic Analysis: There's scant inflation in an economy that's performing well below its potential, which economists call an "output gap." This will enable the Fed to continue both its monetary (lower, short-term interest rates) and quantitative easing (cash interventions) policies to stimulate the U.S. economy and keep credit markets liquid. However, given the large monetary and fiscal stimulus, inflation does remain a longer-term risk. So, the Fed will no doubt begin to withdraw stimulus as soon as it becomes clear the economic recovery is on a sound foundation and is capable of sustaining itself. Given the recovery's current status, that Fed policy change is at least a quarter away, and probably longer.
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