Inflation’s still a threat, but for the moment it’s in remission.
This morning’s update on consumer prices for October echoed yesterday’s report on producer prices by taking a sharp turn south. Consumer prices fell 0.5% last month, the second consecutive descent of that magnitude and the first back-to-back monthly declines since 2005’s November/December. The bottom line: top-line inflation for the past year through October was running at just 1.3%, the slowest annual pace since early 2002.
But wait, there’s more. The encouraging inflation report looks even better with news of cooling core CPI, which ignores food and energy prices. Although core CPI was worrisome in September’s report, it’s less so for October. Core CPI advanced 0.1% last month, the lowest since February and down from September’s 0.2% rate. For the past year through October, core CPI was chugging ahead by 2.8%.
Before we become too giddy, it’s worth pointing out that a 2.8% core inflation rate is still too high. As the chart below reminds, core CPI has climbed sharply over the past two years, reaching a recent peak in September. It’s too soon to tell if October’s downshift is temporary or the start of a secular decline in core pricing pressures. For our money, we’re hopeful, but still wary.
Meanwhile, there’s a bit less pressure on the Fed, although not enough to warrant a rate cut. That appears to be the market’s conclusion as well for the Fed’s next FOMC meeting on December 12. The January ’07 Fed funds futures contract this morning is priced in anticipation of keeping Fed funds at the current 5.25%. And prudently so, as one month a trend does not make. Indeed, it’s important to point out that top-line consumer prices eased for the same reason that wholesale prices did last month: energy prices fell. Seasonally adjusted, CPI’s energy index dropped a hefty 7% last month, following September’s 7.2% tumble. That’s one gift, rest assured, that won’t keep giving.
As for core inflation, there’s reason to remain hopeful. Apparel and transportation prices fell substantially last month, while housing costs were flat, as per CPI’s methodology. Alas, the only thing to do is wait and see if this trend has legs.