Thursday, November 18, 2010

Fed's hand strengthens on tame inflation data

WASHINGTON — Consumer prices barely changed for the third straight month in October, strengthening the Federal Reserve's hand at a time when it is defending a plan to boost the economy by buying more government debt.
A report Wednesday from the Labor Department showed that inflation remains super-low.

A steep rise in gasoline prices drove the consumer price index up 0.2 percent in October, the fourth straight monthly increase. But excluding volatile food and energy costs, core consumer prices were unchanged for the third straight month. In the past year, the core index has risen only 0.6 percent, the smallest increase since the index began in 1957.

Many leading Republican economists and lawmakers have criticized the Fed's bond-buying program, saying it could lead to runaway inflation. Some contend the central bank is essentially printing money to lower the value of the dollar and make U.S. goods cheaper overseas.

But other economists say the bigger threat to the U.S. economy is deflation, a widespread drop in prices and wages that could further erode home values and cripple an already weak economy. The nation hasn't grappled with deflation since the Great Depression.

"The data is definitely in the Fed's camp today and should help keep the Fed's critics at bay," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi. "There is nothing in this data that would push the Fed off its course of continuing to buy government securities."

Warning signs, however, hint that deflation may be coming closer and the recovery in housing seems to have been aborted.

Among troublesome signs in the October report were price declines on new cars and clothing.

While flat prices may seem like a good thing for shoppers, the Fed would like to see prices rise more quickly to keep deflation at bay. When it announced the bond-buying program, the central bank said inflation is "somewhat low" compared to levels it considers consistent with price stability.

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