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Weekly Economic Commentary


Inflation: Signs of Moderation in September Data

October 19, 2011

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The Consumer Price Index (CPI) moved up 0.3% in September, following gains of 0.5% and 0.5% in July and August, respectively. The core CPI, which excludes food and energy, rose only 0.05% in September after a 0.24% increase in August. The September increase is the smallest gain since March 2011 (see Chart 1). These signs of moderation in inflation are noteworthy because they allow the Fed to focus on growth in the inflation-growth debate.dec 10.19 11

From a year ago, the overall CPI increased 3.87% in September vs. a 3.77% increase in August. The core CPI has risen 1.97% from a year ago in September vs. a 1.95% increase in August. The core CPI appears to have reached a peak, for now.dec 10.19 11 2The 0.1% increase in shelter costs and a 0.2% drop in prices of commodities excluding food and energy were the two main factors holding back the core CPI in September (see Chart 3). In addition, the drop in the apparel price index (-1.1%) after four consecutive monthly increases and lower prices for used cars and trucks (-0.6%) following six months of large increases helped to contain the core CPI. Medical care costs advanced 0.2% in September, matching gains seen in each of the prior two months.dec 10.19 11 3The Fed holds the view that inflation numbers will show moderation, given projections of sub-par economic growth, which is somewhat supported by September data. Monthly readings of the CPI and CPI core show a decelerating trend and inflation expectations (Chart 4) do not present a threat as yet. These signs of moderation should keep the hawks of the FOMC from voicing strong concerns about inflation. Sub-par growth and an elevated unemployment rate remain the major concerns of the Fed, for now.dec 10.19 114dec 10.19 114a

Multi-Family Starts Boost Total Home Building Activity

Housing starts increased 15% to an annual rate of 658,000 in September, after a 7.0% drop in August. Multi-family starts increased 51.3% in September, while that of single-family starts rose only 1.7%. The level of housing starts has barely budged from the recession low (see Chart 5). Nevertheless, the increase in homebuilding activity in September is encouraging. On a regional basis, housing starts rose in all four regions of the nation. Permits for building new homes fell in September (-5.0%), with permits issued for multi-family units (-14.5%) recording the larger decline compared with single-family starts (-0.2%). The drop in permit extensions bodes poorly for home building activity in October.dec 10.19 11 5

Housing starts and residential investment expenditures have a strong positive correlation (see Chart 6). Based on this relationship, the 7.5% increase in housing starts in the third quarter could translate into a positive contribution to real GDP growth in the third quarter. The third quarter GDP report is scheduled for publication on October 27.dec 10.19 11 6

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.