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Weekly Economic Commentary


October Consumer Price Index - Signs of Moderation are Noteworthy

November 16, 2011

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The Consumer Price Index (CPI) fell 0.1% in October after three months of hefty gains which ranged between 0.3% and 0.5%. The energy price index dropped 2.0% in October and more than offset increases of all other prices. Lower prices of gasoline and household energy accounted for the overall decline of the energy price index. The food price index rose only 0.1% in October, marking the smallest increase since December 2010.

DEC 11-16-2011 Chart 1

The core CPI, which excludes food and energy, increased 0.1% in October, matching the increase posted in September. Lower prices for cars, a moderate 0.2% gain of the shelter index, and small declines in airfares and recreation costs helped to hold down the core CPI in October. The 0.5% increase in medical care costs, the rapid escalation of rental costs (+0.4%) and the 0.4% gain in apparel prices were the components that provided a lift to the core CPI in October. Of these three price hikes, rental costs and medical care expenses are the problematic categories. The shelter cost index has reversed the decelerating trend of prior months (see Chart 2)

DEC 11-16-2011 Chart 2

Energy costs have played a significant role in recent months in raising the overall CPI. Excluding energy, the CPI moved up only 0.1% in October, after a similar increase in September. The core CPI and CPI excluding energy have both posted gains below 0.15% in September and October (see Chart 3). Although the year-to-year gains of both the CPI and core CPI are beyond the threshold of the FOMC’s tolerance levels, the recent month-to-month moderation of the CPI is consistent with expectations of the FOMC.

DEC 11-16-2011 Chart 3

Incoming economic data present a mixed picture of the economy. The strength of positive economic signals is not strong enough to expect strong self-sustained economic growth in the quarters ahead. In addition, headwinds from the European debt crisis could trim the pace of the real GDP growth. The Fed is expected to engage in large-scale asset purchases in the early-part of 2012 to address the elevated unemployment situation and sluggish pace of economic growth.

DEC 11-16-2011 Table 1

Factory Production Posts Strong Gains, With and Without Autos

Industrial production rose 0.7% in October after a revised decline of 0.1% in the prior month. Factory production, which excludes mining (+2.3%) and utilities (-0.1%), increased 0.5% in October, following a 0.3% gain in the prior month. The 3.1% jump in auto production reflects an increase in autos assembled at an annual rate of 9.3 million units during October vs. 8.75 million units. This represents a big plus for fourth quarter GDP. Excluding autos, factory production moved up 0.3% in October. All in all, these numbers tell a story of strength in factory activity. The operating rate of the nation’s industries has risen to 77.8% October from 75.7% a year ago.

DEC 11-16-2011 Chart 4

DEC 11-16-2011 Table 2

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.