Inflation in U.S. Wanes; Consumer Prices Unchanged

By Timothy R. Homan

Oct. 16 (Bloomberg) -- The cost of living in the U.S. was unchanged in September, restrained by declines in fuel costs, automobile prices and airline fares that show the slowing economy is starting to cool inflation.

The Labor Department's consumer price index was unchanged after a 0.1 percent drop in August; economists had forecast an increase for last month. So-called core prices, which exclude food and energy, rose 0.1 percent, also less than forecast.

Today's figures show that for the first time in two years, prices didn't increase for two straight months. Waning inflation gives Federal Reserve Chairman Ben S. Bernanke scope to lower interest rates further as policy makers attempt to unfreeze credit markets.

``It'll give the Fed a little bit of cover to cut rates when they meet next,'' on Oct. 28-29, John Ryding, chief economist at RDQ Economics in New York, said in an interview with Bloomberg Television.

Treasury securities, which had fallen earlier in the day on signs of easing pressures in money markets, remained lower after the consumer-price report. Yields on benchmark 10-year notes were 4.02 percent at 8:43 a.m. in New York, from 3.95 percent late yesterday.

Economist's Forecasts

Consumer prices were forecast to rise 0.1 percent, according to the median forecast of 75 economists in a Bloomberg News survey. Estimates ranged from a decline of 0.3 percent to a gain of 0.2 percent. Costs excluding food and energy were forecast to rise 0.2 percent, the survey showed.

Prices increased 4.9 percent in the 12 months to September after a year-over-year gain of 5.4 percent in August. The core rate increased 2.5 percent from September 2007, the same as the year-over-year increase in the prior month.

Separately, the Labor Department said initial jobless claims fell last week as job losses related to the Gulf Coast hurricanes subsided, while total benefit rolls rose to the highest level in five years. First-time applications declined by 16,000 to 461,000 in the week that ended Oct. 11.

Some companies are cutting prices to entice cash-strapped consumers who are limiting purchases to essential items such as food and fuel.

Record Decline

Energy expenses dropped 1.9 percent, led by the biggest decrease in the cost of natural gas on record. Gasoline prices fell 0.6 percent.

Oil prices have kept coming down this month. Crude oil futures on the New York Mercantile Exchange dipped below $75 a barrel yesterday after averaging $103.76 in September.

The consumer-price index is the last of three monthly price gauges from the Labor Department. The CPI is the government's broadest gauge of costs because it includes goods and services.

Prices paid to U.S. producers fell for a second month in September, the first back-to-back drop in two years, the government said yesterday. Import costs last month decreased by the most since April 2003, Labor figures showed last week.

Food prices, which account for about a fifth of the CPI, rose 0.6 percent for a second month.

New-vehicle prices dropped 0.7 percent, the most since August 2005, and air fares fell 1.7 percent, the biggest decline since November 2006.

Earnings Weaken

Today's figures also showed wages were unchanged last month, after adjusting for inflation, following an increase of 0.6 percent in August. They were down 2.5 percent over the 12 months to September. The decline in purchasing power is contributing to the slowdown in consumer spending.

The Commerce Department said yesterday retail sales dropped in September by the most in three years.

Mattel, the world's largest toymaker, said this month that most of its holiday toys will cost less than $20 to help lure shoppers who are cutting back on spending.

Wal-Mart Stores Inc. said this month it will cut prices ahead of the holiday season, offering 10 items for $10 each.

Hotel companies are struggling as consumers pull back on spending. Marriott International Inc., the biggest U.S. hotel chain, said in a statement that a measure of rates and occupancy will ``at best'' fall 3 percent in North America in 2009.

The effects of the deepening credit crisis on the economy will cause the unemployment rate to keep rising for another year, reaching 7.3 percent by the last three months of 2009, said Maury Harris, chief U.S. economist at UBS Securities LLC in New York. The rate was 6.1 percent last month, matching a five-year high.

``This is something that is impossible to turn around right away,'' Harris said in an interview on Bloomberg Radio yesterday.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net