US Inflation Rate Eased in October

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Thursday, November 17, 2011

11/16/11 - The overall October CPI index fell by 0.1%, which compares to market forecasts for a flat reading. Excluding the volatile food and energy components, however, the so called core price index increased by an as expected 0.1%. On a year-over-year basis, the rate of increase in the overall CPI eased to 3.5% from 3.9%, and the core inflation rate edged up to 2.1% from 2.0% in September.

The details of the report showed that energy-related prices fell 2% following three months of healthy increases. Gasoline prices dropped by 3.1% in October while housing fuel and utilities costs dipped by 0.2%. Even with the monthly decline in October, gasoline prices were still 23.5% higher than in October 2010. New motor vehicle prices fell by 0.3% after holding steady for the prior three months. These declines were partially offset by rising apparel prices (+0.4%), food prices (+0.1%) and shelter costs (+0.2%). The rise in food prices in October marked the fifteenth consecutive monthly increase and pushed the annual food inflation rate to its highest level (4.7%) since February 2009.

At 3.5%, the headline inflation rate remains elevated; however, the underpinnings of the rise have been soaring energy costs and increasing food prices. In the other 77% of the index, core price increases remain in line with the Fed's assumed 2.0% benchmark. West Texas crude oil prices trended lower in September and early October, and then they started to reaccelerate although remain below the recent peak set in May. Energy prices posted a modest 0.1% monthly gain last November and then spurted higher by 4% in December 2010. Given the volatility in global financial markets and waning risk appetite, we do not expect to see last December's sharp rise replicated this December especially given the recent declines in Brent oil prices.

Core prices are expected to continue to rise at about a 2% year-over-year rate for the remainder of the year and then start to ease modestly as economic slack exerts downward pressure. Financial markets have been looking through the elevated headline inflation readings and remain focused on developments in labour markets. The recent slide in initial claims for unemployment insurance benefits has provided some hope that conditions are starting to improve. Until there is a sustained pickup in employment, however, financial markets will expect the pace of growth to remain lacklustre. The Fed's updated forecast for 2011 and 2012 showed a significant downgrading of GDP growth with limited changes to the forecasts for inflation. For policy, this means more of the same with the focus squarely on keeping monetary conditions conducive to strengthening labour markets.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.


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