Monday, December 18, 2006

Inflation still not a threat

I've repeatedly posted on this blog that inflation is a non issue in the U.S. economy. A lot of the headline numbers in the summer and early fall were lagging indicators and reflected some temporary higher energy fears. With the more recent inflation there is most definitely room for the Federal Reserve to cut rates in Q1-07 if they please. The non inflationary steady growth the economy is currently experiencing will be key for a continuance of the current expansion.

"WASHINGTON (AP) - Consumer inflation was a no-show in November as Americans enjoyed a third straight month of price relief led by big declines in energy costs. Meanwhile, industrial production staged a rebound led by rising output at auto factories.

The Labor Department reported yesterday that consumer prices were unchanged last month, even better than the small 0.2 percent analysts had been expecting. Prices had actually fallen by 0.5 percent in both September and October. The good news in all three months came from tumbling gasoline and other energy costs, which are retreating after a big run-up earlier in the year.....

....Core inflation, which excludes food and energy, was also unchanged in November, the best showing since June. That was likely to boost spirits at the Federal Reserve, which is working to keep inflation in check.

With one month left in 2006, overall inflation is rising at an annual rate of 2.2 percent, down from last year's 3.4 percent increase. Core inflation, excluding energy and food, has been rising at an annual rate of 2.6 percent this year, an acceleration from the 2.2 percent gain turned in last year.

The Fed's comfort zone for core inflation is between 1 percent and 2 percent. It has been working to slow the economy enough through higher borrowing costs to reduce core inflation.At their last meeting of the year on Tuesday, Fed policy makers opted to leave rates unchanged after engineering 17 consecutive rate hikes from June 2004 through June of this year.

Many economists believe the central bank is on the verge of achieving its hoped-for soft landing and will probably leave rates unchanged until May or June of next year, when the next move is expected to be a rate cut to counter unemployment, which is expected to rise in response to the slowing economy.

For November, overall energy costs were down 0.2 percent following even bigger declines of 7.2 percent in September and 7 percent in October. U.S. prices have retreated after global crude oil prices began falling this summer...."

Associated Press - Dec 16, 2006

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