October consumer price indexThe nation's struggle to prevent deflation is apparently only just beginning. Consumer prices rose a less-than-expected 0.2% in October, with the core rate -- which excludes often-volatile food and energy prices -- unchanged for the third straight month. Equally significant, the 12-month core rate fell to 0.6% in October from 0.8% in September -- the lowest year-over-year core rate in the consumer price index's history, which dates back to 1957, the U.S. Labor Department said.

Including food and energy, the overall 12-month inflation is running at a 1.2% rate, slightly higher than the 1.1% year-over-year rate recorded in September. A Bloomberg survey had expected overall consumer prices to rise 0.4% in October and the core rate to tick up 0.1% , after an 0.1% overall increase and no change for the core rate, respectively, in September.

Inflation Too Low For The Fed

Moreover, October's CPI data are likely to support the Federal Reserve's latest quantitative easing program to both stimulate the U.S. economy (and create jobs) and prevent deflation. The Fed wants a little more inflation in the economy.

The reason? Deflation, a protracted, systematic decline in prices, robs companies of revenue and can lead to the dreaded deflationary spiral, in which price cuts lead to lower corporate revenue, prompting more layoffs, leading to further consumer-spending declines, prompting more price cuts and so on. Deflation took hold hold during the Great Depression of the 1930s, making that economic disaster even worse.

That threat, and the economic recovery's subpar GDP growth, are the two main reasons the Fed has expanded its quantitative easing program by up to $600 billion in additional asset purchases, via a second phase, the so-called QE2. The Fed says it expects to buy a maximum of $110 billion in assets per month, but it could be less.

Fed's Lockhart: QE2 Designed To Strengthen Economy

During a speech on Tuesday in Atlanta, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said QE2 has two goals: to prevent deflation, whose capacity to damage the U.S. economy is greater than inflation; and to increase overall demand and strengthen the economy. Lockhart added that QE2 wasn't undertaken to decrease the dollar's value, noting that "the most critical factor in maintaining the dollar's value is a strong U.S. economy with stable inflation, which is also in the world's interest."

Judging from October's CPI report, the Fed still has a ways to go prevent deflation from taking hold: Strip out the volatile food and energy component, and price weakness abounds.

In October, energy prices jumped 2.6%, including a 4.4% surge in gasoline prices, 4.7% jump in fuel oil prices and an 0.4% increase in electricity costs. Food prices rose 0.1%. But elsewhere, the softness was pervasive. Medical care services rose 0.2%, shelter costs edged 0.1% higher, furniture prices were unchanged, recreation costs fell 0.1%, education costs declined 0.1%, personal care prices fell 0.2%, commodity prices (excluding food and energy) declined 0.2%, new-vehicle prices fell 0.2%, clothing costs declined 0.3% and used cars/trucks prices plunged 0.9%.

Greater Risk Remains Deflation

October's consumer price report revealed that the U.S. economy continues to experience low inflation -- too low from the Fed's standpoint. The risk of deflation and its potential debilitating consequences on the economy remains clear. So far price hikes in key commodities such as crude oil, grains and cotton haven't ratcheted up consumer-level inflation. And if commodity price trends reverse, that would only put more downward pressure on consumer prices.

So, from the inflation perspective, the Fed will be able to stick to its expanded quantitative easing policy at least through the first quarter of 2011. At this point in the expansion, the greater risk remains deflation, not inflation.

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25 Comments

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Robert & Lisa

Your standard of living is falling. Thanks, George Soros's puppets, Obama and thugs.

November 18 2010 at 4:47 AM Report abuse +2 rate up rate down Reply
Robert & Lisa

That headline is a total lie. "Lowest ever" is totally untrue. These writers are some of the worse.

November 18 2010 at 4:45 AM Report abuse +2 rate up rate down Reply
ultraz2

THE END IS GETTING CLOSER----NATIONAL DEBT 14 TRILLION---WAIT A MINUTE IF WE HAVE DEFLATION SHOULDN'T THE NATIONAL DEBT BE 12 TRILLION????????

November 17 2010 at 10:42 PM Report abuse +4 rate up rate down Reply
2 replies to ultraz2's comment
enpassant44

NO, the national debt will stay the same. That's one of the problems with deflation. Debts are harder to pay off.

November 18 2010 at 1:17 AM Report abuse rate up rate down Reply
Robert & Lisa

And that is why the government won't let us have real deflation. They have to print money to pay off the debt. Simple for anyone with a brain.

November 18 2010 at 4:46 AM Report abuse +2 rate up rate down Reply
ultraz2

TARP BANKS BAILOUT HAS STARTED THIS NEW COLLASPE---TARP BANKS WILL FAIL REGARDLESS OF BAILOUT BY THE TAX PAYERS---TOO MANY BAD LOANS

November 17 2010 at 10:35 PM Report abuse +3 rate up rate down Reply
ultraz2

There is NO INFLATION THAT'S WHY 30 YEAR MORTGAGE INTREST RATES SHOULDD BE 2 1/2 % TO 3 %

November 17 2010 at 10:19 PM Report abuse +2 rate up rate down Reply
fred

Look at it this way, girls: If you are retired on a fixed income, deflation is great. If you work for a living and inflation is rampant, the government (federal, state, and local) love it because you continue jumping into higher tax brackets. That way they have more of YOUR money to piss away. No wonder they hate deflation and love inflation! As always, it just depends on whose ox is getting slaughtered for the party.

November 17 2010 at 9:35 PM Report abuse +3 rate up rate down Reply
1 reply to fred's comment
enpassant44

Deflation increases unemployment, because companies' profits are lower, but their payrolls are not, unless they cut hours or lay people off.

November 18 2010 at 1:19 AM Report abuse +1 rate up rate down Reply
andfinsoln

Who cares about core inflation? It's the food and energy that is taking a larger chunk out of our incomes. I find it truly amazing how many times Congress has changed the definition of inflation since Jimmy Carter was President in order to reduce or avoid altogether the COLAs of retirees.

November 17 2010 at 9:20 PM Report abuse +3 rate up rate down Reply
jhrochesterny

Not including food and energy leads us to believe things are OK, when these things are included, it isnt so nice. Whats so wrong about lower prices anyway? Certainly higher prices havent brought more jobs, maybe if prices are lower people would have more to spend and that might create demand and jobs.

November 17 2010 at 6:42 PM Report abuse +3 rate up rate down Reply
zackchem

The government is our "best friend" :-) when calculating inflation - "excluding food and energy cost". Isn't food and energy cost a big component of our living standard?. What a joke!. Inflation should be calculated as a composite of everything the consumer buys. This so call low inflation is a bunch of "malarka".

November 17 2010 at 3:07 PM Report abuse +7 rate up rate down Reply
nmaccanico

Sorry, I meant mid to late 1700s.

November 17 2010 at 3:05 PM Report abuse -1 rate up rate down Reply