Inflation Probably Eased in September

The cost of living in the U.S. probably eased in September and the pace of factory production held steady, consistent with the Federal Reserve’s forecast of moderating inflation and slow growth, economists said reports will show this week.

Consumer prices rose 0.3 percent, the smallest gain in three months, according to the median forecast of economists surveyed by Bloomberg News before Labor Department data on Oct. 19. Industrial output increased 0.2 percent for a second month in September, while sales of previously owned homes declined, other reports may show.

Clothing retailer Gap Inc. (GPS) and supermarket chain Safeway Inc. (SWY) said they are limited in how much they can raise prices to make up for higher raw materials expenses as weak job and income gains squeeze consumers. Contained inflation expectations and labor costs gave Fed officials scope last month to pursue monetary policy geared at stoking the economic recovery.

“The burden has shifted away from inflation,” said Bricklin Dwyer, an economist at BNP Paribas in New York. “The Fed’s concern right now is that growth slows too much. The economy is just muddling along.”

The industry at the forefront of the recovery that began in June 2009 -- manufacturing -- stumbled in the third quarter as the global economy cooled and American consumers cut back.

The Fed’s data on September industrial production, or output at factories, mines and utilities, is due tomorrow.

Regional reports this week may show manufacturing contracted in October in some areas. The so-called Empire State Index, which covers New York, northern New Jersey, and southern Connecticut, will also be released tomorrow. On Oct. 20, the Fed will report on factory activity in the Philadelphia area.

Equipment Makers

The slowdown helps explain this year’s decline in shares of equipment makers. The Standard & Poor’s Supercomposite Machinery Index has fallen almost 14 percent this year compared with a 2.6 percent drop for the broader S&P 500 gauge.

The Labor Department report on consumer prices may also show that the so-called core index, which excludes volatile food and fuel costs, climbed 0.2 percent for a fifth consecutive month, according to the Bloomberg survey median.

Compared with the same month last year, the core CPI gauge rose 2.1 percent, the most in three years, according to economists’ median forecast. Fed policy makers aim for long-run core inflation of about 1.7 percent to 2 percent.

Most Fed officials at the Sept. 20-21 meeting anticipated both core and headline inflation was “likely to settle, over coming quarters, at or below the levels they see as most consistent with their dual mandate,” according to minutes released on Oct. 12.

‘Decline Moderately’

“With stable inflation expectations, significant slack in labor and product markets, slow wage growth, and little evidence of pricing power among firms, inflation was likely to decline moderately over time,” the minutes said. Participants also saw “considerable uncertainty surrounding the outlook for a gradual pickup in economic growth.”

The outlook on inflation is in sync with retailers’ moves. A jump in cotton expenses hurt Gap’s Old Navy stores that sell more clothing made of the material, yet it “chose not to raise prices commensurate with cost given the impact of the tough economy on our customers,” Chief Financial Officer Sabrina Simmons said on a conference call with analysts on Oct. 13.

Steven Burd, chairman and chief executive officer of Safeway, said inflation was “predominantly in perishable categories” and fuel, while there were “a couple of categories that actually had deflation.” The ability to raise prices was limited as shoppers at the Pleasanton, California-based company remain “very conscious” of the price tag, he said.

Price ‘Sensitive’

“When we get a cost increase, we consistently pass it along,” Burd said on a conference call on Oct. 13. At the same time “we’re sensitive if we’re approaching a holiday and we’re sensitive on the promotional price,” he said.

Some raw materials costs are still working their way through the chain as businesses try to recoup oil and other commodity expenses that have receded from earlier this year. Economists forecast a report on Oct. 18 may show the prices paid to producers rose 0.2 percent last month after no change in August.

The import-price index, released last week, climbed 0.3 percent in September, reflecting a surge in metals and crude oil costs from prior months. The CPI is the broadest of three price gauges from the Labor Department.

While inflation concerns dissipate, housing is weighing on the economy. Economists in the survey project sales of previously owned houses dropped 2.1 percent last month, a sign unemployment at 9.1 percent and persistent foreclosures are delaying a rebound in the industry. The figures are due from the National Association of Realtors on Oct. 20.

The Commerce Department may report on Oct. 19 that housing starts rose 3.9 percent in September from a three-month low, according to the Bloomberg survey median. Permits, a sign of future construction, probably declined 2.4 percent.

                         Bloomberg Survey

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                        Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
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==
Empire Manu. Index       10/17      Oct.      -8.8      -4.0
Ind. Prod. MOM%          10/17     Sept.      0.2%      0.2%
Cap. Util. %             10/17     Sept.     77.4%     77.5%
PPI  MOM%                10/18     Sept.      0.0%      0.2%
Core PPI MOM%            10/18     Sept.      0.1%      0.1%
PPI  YOY%                10/18     Sept.      6.5%      6.4%
Core PPI YOY%            10/18     Sept.      2.5%      2.4%
NAHB Housing Index       10/18      Oct.       14        15
CPI  MOM%                10/19     Sept.      0.4%      0.3%
Core CPI MOM%            10/19     Sept.      0.2%      0.2%
CPI  YOY%                10/19     Sept.      3.8%      3.8%
Core CPI YOY%            10/19     Sept.      2.0%      2.1%
CPI NSA Index            10/19     Sept.    226.545   226.931
Housing Starts ,000’s    10/19     Sept.      571       594
Housing Starts MOM%      10/19     Sept.     -5.0%      3.9%
Building Permits ,000’s  10/19     Sept.      625       610
Building Permits MOM%    10/19     Sept.      4.0%     -2.4%
Initial Claims ,000’s    10/20     15-Oct     404       400
Cont. Claims ,000’s      10/20     8-Oct      3670      3680
Exist Homes Mlns         10/20     Sept.      5.03      4.93
Exist Homes MOM%         10/20     Sept.      7.7%     -2.1%
LEI  MOM%                10/20     Sept.      0.3%      0.2%
Philly Fed Index         10/20      Oct.     -17.5      -9.6
================================================================
==

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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