U.S. Economy: Consumer-Price Increases Slow, Factories Expand

The cost of living in the U.S. rose at a slower pace while manufacturing expanded in the New York and Philadelphia regions, indicating the recovery from recession isn’t stoking inflation.
Consumer prices rose 0.2 percent in September after a 0.4 percent gain in August, the Labor Department said today. Reports from the Federal Reserve Banks of New York and Philadelphia showed factories increased production this month.

The consumer-price report backs Fed policy makers who argue that interest rates should be kept near zero for a long time to nurture a recovery from the worst recession since the 1930s. Economists project the jobless rate will exceed 10 percent by early 2010, even as a report today showed claims for unemployment benefits declined last week.

“The economy still has a tremendous amount of slack,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The low inflation numbers we’re likely to see will give policy makers the flexibility to take their time in raising rates.”

Economists forecast consumer prices would rise 0.2 percent, according to the median of 79 projections in a Bloomberg News survey. Estimates ranged from a decline of 0.2 percent to a gain of 0.5 percent.
Treasuries were down at 12:14 p.m. in New York after initially rising following the consumer-price report. The yield on the 10-year note rose two basis points, or 0.02 percentage point, from yesterday to 3.44 percent.

Lower prices are hurting sales at businesses such as Spartan Stores Inc., which distributes groceries and runs supermarkets. Food prices, which account for about a seventh of the consumer-price index, decreased 0.1 percent in September, reflecting cheaper meats and produce.

‘Challenging Environment’ 

Dennis Eidson, the Grand Rapids, Michigan-based company’s chief executive officer, said yesterday in a statement that he expects weakness for the remainder of its fiscal year due to “product price deflation” as consumers “behave cautiously given the challenging economic environment.”

Energy prices increased 0.6 percent in September as the cost of gasoline climbed 1 percent. Excluding food and energy costs, the so-called core index climbed 0.2 percent, more than anticipated and pushed up by health care and a rebound in auto prices following the expiration of the government’s “cash for clunkers” program.

Rents, which make up almost 40 percent of the core CPI, fell for the first time in 17 years. With unemployment at a 26- year high and record levels of homes sitting vacant, landlords are unlikely to raise rents.

Housing ‘Oversupplied’ 

“There is no question that housing is oversupplied and that is going to keep inflation numbers low,” Vitner said.

Regional Fed bank reports indicated that manufacturing, which has helped drive the recovery from the recession, continued to expand this month.

The Philadelphia Fed’s general economic index dropped to 11.5 in October from a September reading of 14.1 that was the highest since June 2007. The Fed Bank of New York’s economic index soared to 34.6 this month, the highest since mid-2004, from 18.9 in September. Readings above zero indicate expansion.

Automakers are among manufacturers that have benefited from the government’s clunkers program, which lifted car sales by giving incentives to consumers to trade in older vehicles for new, more fuel-efficient ones.

General Motors Co. said Oct. 7 that it plans to build 655,000 vehicles in North America during the fourth quarter to boost output to match increasing demand.

Near-Record Inventories 

Inventories near record-low levels set the stage for a rebound in production when consumer spending strengthens, economists said. Unemployment is likely to damp consumer demand even as the economy picks up.

“Manufacturing is continuing to expand, with factories increasing their production and inventories not being liquidated as fast as before,” said David Semmens, an economist at Standard Chartered Bank in New York. “While the corner has been turned, firms will look for a pick-up in final demand beyond the second half of 2009 before becoming too optimistic.”

The number of Americans filing first-time claims for unemployment benefits dropped by 10,000 to 514,000 in the week ended Oct. 10, lower than forecast, from a revised 524,000 the week before, Labor Department data showed.

“While the pace of firings has begun to moderate, it has become increasingly evident that businesses are not in any rush to add to payrolls,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “The labor market holds the key for consumer spending.”


‘Extended Period’ 

Fed Vice Chairman Donald Kohn this week said inflation and growth will probably stay below the central bank’s objectives for some time, warranting low interest rates for an “extended period.” His concerns echoed those of New York Fed President William Dudley.

In contrast, Kansas City Fed President Thomas Hoenig and Fed Governor Kevin Warsh have been among those saying rate increases may happen sooner, or with more force, than some investors anticipate.

The minutes of the policy-making Fed Open Market Committee’s Sept. 22-23 meeting, released yesterday, showed officials weighed the risks that an anemic recovery would lead to “subdued and potentially declining wage and price inflation.”

- Via Bloomberg