Inflation Still Muted; Factory Output Grows

edward

Inflation Still Muted; Factory Output Grows

By SUDEEP REDDY

ECONOMY
• DECEMBER 16, 2010

Inflation remained extremely low in November, despite signs of a strengthening economic recovery, while industrial production saw its largest gain in four months.
The consumer price index rose 0.1% for the month, putting it up just 1.1% from a year earlier, the Labor Department said. The "core" measure of consumer prices, excluding volatile food and energy costs, also increased just 0.1% and was up a scant 0.8% from a year ago.   



The slow price increases reflect the immense slack across the economy. The Federal Reserve decided this week to leave its $600 billion bond-buying program unchanged in part because underlying inflation has been running under its target of just below 2%. The Fed said progress toward its goals of price stability and full employment "has been disappointingly slow."
  Unemployment at 9.8% is limiting wage gains for workers while many merchants avoid raising prices amid still-weak demand. But the economic recovery has shown signs of gathering steam. That could relieve some of the downward pressure on consumer prices.

"We're probably at the trough right now" for underlying inflation, said UBS economist Samuel Coffin. "The general recovery and broader growth should take away this [downward] inflationary pressure."
Some key components of the consumer price index, such as rents, are showing signs of turning around after years of flat or declining prices. UBS economists expect slow rent increases to help push the year-over-year underlying inflation rate up gradually to 1.4% by the end of next year.
  Energy prices rose 0.2% from a month earlier, marking the slowest increase in five months. Food prices also increased 0.2%, the latest sign that rising commodity costs aren't translating into substantially higher retail prices. Education, apparel and transportation prices also rose while prices for recreation and communications products were flat.

Industrial Output Gains
Meanwhile, gains in manufacturing and utility output pushed industrial production up 0.4% during November, the Federal Reserve said.
Utilities output rose 1.9% due to cold weather. Manufacturing increased 0.3% from gains in production of electronics, appliances and industrial equipment, offsetting a sharp drop in auto production. But industrial firms are still facing huge excess capacity. Capacity utilization increased to 75.2%, up 0.3 percentage point from October, putting it at the highest level since late 2008—but still well below its average of 80.6% from 1972 to 2009.


Separately, the National Association of Home Builders said its index of builder confidence remained flat at an extremely weak 16 in December. The measure, based on a survey of builders, gauges perceptions of current and expected home sales.

The index stood at 22 in May before the market stumbled after the expiration of a home-buyer tax credit. The measure was frequently above 60 in the first half of the decade before the housing market peaked.

Write to Sudeep Reddy at sudeep.reddy@wsj.com

Arranged by Dr. Chao, 2010/12/17