Federal Reserve Chairman Ben Bernanke, chief inflation-watcher for the U.S. economy.(Photo: Manuel Balce Ceneta, AP)
As expected, the government said Thursday that rising food costs and
higher rents offset a drop in gas prices last month, leaving consumer
prices slightly higher in October compared with the previous month.
Labor Department said the consumer price index rose a seasonally
adjusted 0.1% in October, down from sharp gains of 0.6% in each of the
previous two months.
In the past 12 months, prices increased 2.2%, just above the Federal Reserve's inflation target of 2%.
prices rose 0.2%, while gas fell 0.6%. Excluding the volatile food and
gas categories, core prices increased 0.2% in October.
The cost of
shelter, which includes rents, rose 0.3%, the most in more than four
years. Clothes and airline fares also rose, while the price of new and
used cars fell.
Wall Street seems convinced that inflation is deader than Marley's ghost in
A Christmas Carol
. Investors could be right.
bonds will have a merry day Thursday since the government's latest
report on its most-watched gauge of inflation for consumers appears to
confirm Marley's passing.
The CPI covers everything from the apples you eat to the Apple products you use to call and email your friends.
in food prices are an almost perfect offset for gas prices going down,"
says Mike Montgomery, senior economist at IHS.
When prices aren't
rising, the inflation-fighting Fed has little reason to raise interest
rates. Higher rates are poison for bond investors. Bond prices fall when
interest rates rise, making them less valuable and a lower-return
The Fed is engaged in an unprecedented effort to boost
economic growth and spur job creation. It is buying $40 billion of
asset-backed securities every month, which is helping keep rates
low.It's the Fed's third effort in as many years to help a subpar
economic recovery and a jobless rate that has been stuck near 8% all
The Fed's hope is that lower interest rates will spur
consumers and businesses to borrow for homes, factory expansions and
other economic activity that kicks up growth.
There's a lot of
money betting that rates will stay low: Investors have poured an
estimated $283 billion into bond funds this year, according to the
Investment Company Institute, the mutual fund trade group.
if the CPI skews higher, economists think the Fed will keep rates low.
Sung Won Sohn, a professor of economics at Cal State University, thinks
inflation will hit an annual pace of 3.6%. But he doesn't think the Fed
will raise rates.
"Right now, they're more concerned with
deflation than inflation," he says. Why? Even though the Fed's efforts
to help the economy are potentially inflationary, a worldwide slowdown
in economic growth, including recessions in parts of Europe and Asia,
and the risk of another recession in the U.S. if the "fiscal cliff"
isn't avoided is keeping demand for goods and services in check.
demand, prices don't rise. In fact, the fear is that retailers and
wholesalers will cut prices to attract customers. And finding inflation
would be like hunting down Marley's ghost.