The consumer price index for October, to be released Wednesday by the U.S. Bureau of Labor Statistics, is unlikely to have much effect on the markets or on how the Federal Reserve will act, economists say, as the focus right now is clearly on growth. Still, the report could have some influence on the medium-term outlook for price pressures.
Economists are expecting core consumer prices to rise by 0.1% in October, the same pace seen in September and slower than the 0.2% pace seen in August. The consensus forecast for the all-items index is for a 0.8% contraction, following the flat reading in September and the 0.1% deflation in August.
Economists Brian Bethune and Nigel Gault from IHS Global Insight said gasoline prices should plunge 16% in the month, while food prices should ease and general cost pressures should diminish.
"The retreat of the consumer price index was put on hold in September when the hurricanes interrupted the decline in energy prices, but with those effects now far removed we expect the index to fall 0.9% in October," they wrote in a client note.
Looking at the core rate, Bethune and Gault said they look for an advance between 0.1% and 0.2%, adding that minor increases of 0.1% are likely to be the norm in the medium term.
Economists from Barclays Capital look for core CPI to climb higher and expect inflation to start to level off. "The deterioration in growth, decline in energy prices, and sharp rally in the dollar are likely to put downward pressure on core inflation in October and in subsequent months. However, stable inflation expectations and steady wage gains suggest these factors are unlikely to produce a more pronounced disinflation," they said.
The consensus looks for annual core inflation to fall by one-tenth to 2.4%, a rate still four-tenths above the Fed's preferred rate. But going forward, all indications are that inflation will moderate as the world economy slows.
The all-items annual inflation rate is expected to come down more dramatically to 4.0%, from a 4.9% rate in September.
On the report's market potential, Paul Mendelson, chief investment officer at Windham Financial Services, said the focus has clearly turned from inflation towards growth. Even if inflation is higher than expected, he said the trend is clearly downwards. "How can inflation not be falling in this environment?" he asked.
On whether deflation could set in, Mendelson said the liquidity the Treasury has pumped into the system should stem such concerns.
The CPI report follows the release of the producer price index on Tuesday, which showed a record drop in the 61-year index. The all-items index dropped back 2.8% in the month, driven mostly by falling energy prices, including a massive 25.9% decline in gasoline prices.
Following the PPI release, economist Anika Khan from Wachovia wrote that the report gives the Federal Reserve the green light to cut rates once again. "As global economic growth trends downward, wholesale price inflation should be less of a problem in the coming months," Khan wrote.
After the CPI release for September, chief U.S. economist Ian Shepherdson from HFE declared that inflation had peaked, and predicted "huge declines" in the headline and slower rises in core inflation in the months ahead. He predicted a negative year-over-year headline by the middle of 2009.
Released at the same time will be the October index for U.S. housing starts & permits, which is expected to reach cyclical lows in both categories.
By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008