Inflation creeps up in October on higher energy, auto prices

A few bread crumbs for the inflation hawks in October, as consumer prices rose 0.3% in October, the U.S. Labor Department announced Wednesday. Energy prices rose for the fifth time in six months.

The core rate -- which excludes the often-volatile food and energy component -- rose 0.2%. Economists surveyed by Bloomberg News had expected consumer prices to increase 0.2% in October, and the core rate to rise 0.1%.
Even with the rise in October, the U.S. economy over the past year still shows little sign of inflation. Consumer prices have actually declined 0.2% in the past 12 months.

Meanwhile, the core CPI, closely monitored by the U.S. Federal Reserve, has risen 1.7% in the past year – within the Fed's 'comfort zone' for inflation.

In October, one can clearly see the price impact of increased car demand stemming from the federal government's $4,5000 "cash for clunkers" tax credit: new car prices rose 1.6%. Also, energy prices increased 1.5%, food prices inched 0.1% higher, commodity prices (excluding food and energy) increased 0.4%, rose medical care rose 0.2%, apparel prices fell 0.4%, and recreation prices declined 0.4%

Most economists do not expect inflation to rise in the months ahead. The recession that has idled factory production and resulted in more than 7.6 million layoffs has resulted in excess capacity in the commercial sector and slack in the labor force that will limit price and wage increases.

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

Politically, October's low inflation rate will provide support for lawmakers in Washington who are seeking another stimulus package to jump start the U.S. job market through infrastructure work and tax credit hiring incentives; there's little sign that the stimulus allocated to-date has increased inflation.

Analysis: Once gain, a modest monthly inflation report, with the key stat being the 0.2% rise in the core rate. Even after more than six months of fiscal stimulus, the core rate has barely risen, which underscores the sluggish demand in the U.S. economy. Inflation remains tame, which will enable the Fed to continue its accommodative monetary policy for a longer period of time to stimulate the U.S. economy, without the fear of rising inflation. Based on the current inflation trend, it's high unlikely that the Fed will increase interest rates before the end of Q1 2010.
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