Inflation Turning Corner; Factory Output Rises
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.
"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.