Consumer Prices Barely Budge But 0.2 Percent Increase Reflects Inability Of Businesses To Pass On Higher Costs
Another milder-than-expected consumer price increase reported Thursday held U.S. inflation to a three-decade low, suggesting short-term interest rates won’t increase for the rest of the year.
But economists warned of a dark lining in the silver cloud. The modest 0.2 percent advance in the Consumer Price Index for September underscores businesses’ inability to pass on higher labor costs to customers.
“At some point that will crunch profits,” said economist Paul Getman of Regional Financial Associates in West Chester, Pa. “Ultimately, that may be what derails the stock market, not higher rates, but the inability to pass on higher costs.”
For the first nine months of the year, the Consumer Price Index has risen at an annual rate of just 1.8 percent, compared with 3.3 percent last year.
Excluding food and energy costs, which bounce around from month to month, so-called “core inflation” is 2.2 percent so far this year. If sustained for the rest of the year, that would be the best performance since 1965.
Tame inflation means Social Security recipients will receive a 2.1 percent cost-of-living increase, the smallest since 1987. However, it also means the Federal Reserve probably can refrain from raising short-term interest rates at its policy meetings in November and December.
“Some day I think the Fed will do a quarter-point of tightening … but it doesn’t have to be soon,” said economist Allen Sinai of Primark Decision Economics in New York.
Inflation remained subdued in September, despite the second consecutive sharp monthly increase in gasoline and other energy costs. There were offsetting declines in vegetable and pork prices and auto financing charges.
Last week, the Labor Department reported a large 0.5 percent jump in prices paid to factories and other producers. Economists had expected more of that to filter through to retail prices, especially with growing upward pressure on wages from the booming jobs market.
A separate Labor Department report suggested a labor scarcity continues. New applications for unemployment benefits totaled 306,000 last week, an increase of 2,000 but the fifth straight week at less than 310,000, the longest such stretch since 1988.
Business executives acknowledge wage pressures, mostly for high-tech jobs, but say keen competition both at home and abroad has removed their ability to raise prices.
Still, a survey by the National Association of Manufacturers found 93 percent with a very positive or somewhat positive outlook for their firms’ prospects.
Supporting that, the Commerce Department said inventories at the nation’s businesses rose a smaller-than-expected 0.2 percent in August after a scant 0.1 percent rise in July. That implies factories will have to increase production if demand increases.
In details of September’s prices, the government said food costs rose just 0.1 percent, held back by declines in vegetables, oranges, pork and coffee.
Energy jumped 1.3 percent after a 1.7 percent gain in August. Gasoline rose 1.8 percent. Electricity increased too, but fuel oil edged lower.
xxxx DOW DROPS The Dow Jones industrial average shed more than 119 points Thursday to close at 7,938.88.