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Inflation Shy of Goal Means Fed Can Keep Rates Low: Economy

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The cost of living in the U.S. barely rose in September, restrained by decelerating prices for a broad array of goods and services that signal the Federal Reserve can keep interest rates low well into 2015.

The consumer-price index climbed 0.1 percent after decreasing 0.2 percent in August, a Labor Department report showed today in Washington. Over the past year, costs increased 1.7 percent, the same as in the 12 months through August.

While plunging fuel costs are one reason for the restraint in pricing, clothing retailers, medical-care providers and airlines are also among those keeping a lid on charges. With inflation falling short of the Fed’s goal, policy makers need not rush to raise rates even as the world’s largest economy shows no sign of succumbing to a slowdown in global growth.

“Inflation remains very tame,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, and the top forecaster of the consumer price index over the past two years, according to data compiled by Bloomberg. “For now, it gives the Fed the green light to keeping monetary policy accommodative. Over the long haul, they’d prefer to see inflation go up a little.”

Stocks fell, halting a four-day rally, as energy shares led losses amid a drop in oil prices. The Standard & Poor’s 500 Index declined 0.7 percent to 1,927.11 at the close in New York.

Survey Results

The median forecast of 84 economists surveyed by Bloomberg called for no change in consumer prices. Estimates ranged from a drop of 0.2 percent to gains of 0.2 percent.

Excluding volatile food and fuel, the so-called core measure also advanced 0.1 percent in September after being little-changed the prior month. The gauge rose 1.7 percent since September 2013.

Higher rents are the main reason prices are rising at all. Excluding food, fuel and shelter costs, consumer prices dropped 0.5 percent at an annualized rate over the past three months, the biggest decrease in records dating back to 1967, based on Bloomberg calculations.

Those costs were up 0.9 percent over the past 12 months, close to the 0.8 percent increase in the year ended in February that was the smallest in a decade.

Energy prices fell 0.7 percent in September from a month earlier, and will probably drop even more this month.

The average cost of a gallon of regular gasoline declined to $3.09 yesterday, the lowest since 2011, according to AAA, the biggest U.S. motoring group.

Purchasing Power

A slowdown in global economic growth is among reasons energy and commodity costs are slumping. Lower fuel bills are also helping boost consumer confidence and purchasing power, which will underpin the U.S. expansion.

“There are very few price pressures throughout the economy,” said Gus Faucher, an economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly projected the increase in CPI last month. “It’s generally positive for consumer spending.”

The drop in fuel will free up as much as $60 billion over the next year that the consumers can spend on other goods and services, according to economists at Barclays Plc and JPMorgan Chase & Co.

Workers are counting on restrained inflation to help paychecks stay above water as wages have been slow to pick up. Hourly earnings adjusted for inflation dropped 0.2 percent in September, after a revised 0.6 percent increase the prior month, a separate report from the Labor Department showed. They were up 0.3 percent over the past 12 months, following a 0.5 percent gain in the year through August.

Price Breakdown

Today’s CPI report showed clothing prices were unchanged last month and airline fares slumped 0.5 percent. Medical services, including visits to hospitals and doctors’ offices, climbed 0.1 percent, capping a 1.7 percent increase over the past 12 months that was the smallest in six decades.

The one standout is rents, which rose 0.3 percent last month and were up 3.3 percent over the past year.

Restrictive mortgage lending is preventing some potential buyers from entering the real-estate market, instead pushing them into apartments. The rental vacancy rate dropped to 7.5 percent in the second quarter, the lowest since 1997, according to figures from the Commerce Department.

At 1.5 percent in the year ended in August, the Commerce Department’s inflation rate tied to consumer spending, the Fed’s preferred measure, has fallen short of the central bank’s 2 percent goal for more than two years.

Fed Concern

Some Fed policy makers are growing concerned that global economic weakness threatens to push inflation in the U.S. to dangerously low levels. Economists say deflation can encourage households to delay spending in the hope that prices will fall further, sapping demand and undermining growth.

Federal Reserve Bank of St. Louis President James Bullard said last week that the central bank should consider delaying plans to end its bond-buying at the end of this month to halt a decline in inflation expectations.

“Inflation expectations are declining in the U.S.,” he said in an interview on Oct. 16 with Bloomberg News in Washington. “That’s an important consideration for a central bank. And for that reason, I think that a logical policy response at this juncture may be to delay the end of the QE.”

The Fed, which cut interest rates to near zero in December 2008, had said last month that quantitative easing would probably end after its next meeting, on Oct. 28-29, and reiterated that rates would remain low for a “considerable time” after the asset purchases program ends.

Rate Outlook

“Mid-2015 remains the most likely time for the Fed to start increasing rates,” said PNC’s Faucher, adding he projects the central bank to wrap up bond purchases at its meeting next week.

Disappointing earnings and forecasts from Wal-Mart Stores Inc., Mattel Inc., Urban Outfitters Inc. and Netflix Inc. indicate consumers are being cautious about their spending, from groceries to teenage fashion and entertainment. That may prevent sellers from raising prices in coming months.

Some chains are lowering prices to attract shoppers. Family Dollar Stores Inc., a discount retailer, this month reported earnings that missed analysts’ estimates after price cuts narrowed profit margins. The Matthews, North Carolina-based company had tried to revive sales in March by reducing prices on 1,000 items.

(Updates with closing stocks in fifth paragraph.)
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