CPI Increases Remain Moderate

Pricing pressure continued under control last month. The overall October CPI roughly matched Consensus expectations and rose 0.3%, despite energy prices which rose m/m. Stripping out both energy & food prices, consumer prices increased 0.2% as they did during September. However, the y/y increase in "core" prices picked up modestly to 1.7% from its weakest since early-2004.

Energy prices continued their recovery with a 1.5% m/m increase, bringing the three-month annual rate of growth to 30.1%. Fuel oil prices surged 6.0% (-23.5% y/y) after smaller gains during the prior two months while gasoline prices increased another 1.6% (-17.9% y/y) following a 1.0% gain during September. Finally, prices for natural gas & electricity rose 0.9% (-7.2% y/y) after little change during the prior two months.

Food & beverage prices continued weak last month with a 0.1% uptick. So far this year, food prices have fallen an unprecedented 0.6%. Recent weakness has been led by lower dairy prices (-8.2% y/y) and lower fruit & vegetable (-5.6% y/y) costs. Prices for meats, poultry, fish & eggs also fell 4.8% y/y while cereals & bakery product prices were off 0.6%.

Inflation in the CPI less food & energy also remained moderate but, like the previous month, the 0.2% October increase was slightly firmer than expected. Price gains accelerated to a 2.0% annual rate since December of last year. That's only slightly below the 2.3% rates of increase during the last two years.

Despite the weak economy, the acceleration in core price inflation this year owes to faster increases in core goods prices. Their 0.4% increase last month lifted the annualized rate so far in 2009 to 3.2% from no change during the prior two years. Higher tobacco prices continued to account for much of that acceleration. In addition, there has been a firming of prices elsewhere. Prices for new & used motor vehicles have firmed despite an aggressive marketing campaign, up 1.7% last month and at a 5.2% rate since December. They rose 0.3% last month and at a 35.0% annual rate since December. That compares with price deflation during the last two years. Though apparel prices ticked 0.4% lower last month they've risen at an accelerated 2.3% rate this year. That follows price declines which extends back to 1994. Continuing weak were prices for household furnishings & operation. They fell another 0.5% leaving them down at a 1.0% rate so far this year.

The U.S. recession continued to hold back growth in core services prices. Again, they ticked up just 0.1% last month and have risen at a 1.5% annual rate so far this year, half that in 2008 and nearly the weakest since 1983. Weakness in the housing market accounts for much of that moderation. Last month, shelter prices were unchanged and they've risen at a just a 0.6% annual rate so far in 2009. Owners equivalent rent of primary residences, a measure not equivalent to other house price measures, again slipped m/m and have risen at a 1.0% rate so far this year versus a 2.5% 2008 increase. Elsewhere in services, public transportation prices again were strong and rose 0.9% (-4.5% y/y). Medical care services prices ticked up 0.2% but at a 3.4% rate this year. That compares to a 4.2% increase last year. Finally, education costs have been firm and they're up at a 4.9% annual rate this year after a 5.8% gain during 2008. However, recreation prices are roughly unchanged this year after a 1.6% 2008 gain.

The chained CPI, which adjusts for shifts in consumption patterns, rose 0.1% during October while year-to-year prices fell 0.5%. Conversely, chained prices less food and energy firmed last month by 0.3%, only the second material gain in five months.

The consumer price data is available in Haver's USECON database while detailed figures can be found in the CPIDATA database.

Housing sector activity continued to moderate after increases this past spring. Housing starts fell last month to 529,000 (AR) units versus 592,000 during September which was revised up slightly. The latest level was the lowest since April and down nearly one-third y/y. More sobering was that since the peak in January of 2006 starts have fallen by more than three-quarters. In addition, October's figure fell well short of Consensus expectations for 600,000 starts.

Loss of forward momentum was evident in the decline in starts of single-family homes. They fell 3.9% last month to 476,000 units (AR), reversed all of the prior month's increase and were at the lowest level since May. Despite these disappointments, however, single-family starts were one-third higher than the February low. During the last ten years, there has been an 84% correlation between the q/q change in single-family starts and their contribution to quarterly GDP growth.

A further loss of momentum was evident in the multi-family sector where starts starts fell by one-third m/m during October to the record low. Starts of apartments, condominiums & town houses were down 88.2% from the January 2006 peak.

Starts of single-family units fell throughout the country last month. Single-family starts in the Northeast fell 9.6% (-17.5% y/y) while starts in the South fell 7.3% (-4.9% y/y). In the Midwest starts declined 4.8% (-16.8% y/y) and starts in the West fell 5.9% (-16.5% y/y) to their lowest level since May.

Building permits dropped 4.0%, the third decline in four months, but remained 10.8% above their record low reached in April. As with starts, permits to build a single-family home have been relatively strong. They fell just 0.2% last month and were down 4.0% y/y.

The housing starts figures can be found in Haver's USECON database.

How Rigid Are Producer Prices? from the Federal Reserve Bank of New York can be found here.

Since the spring recovery, housing activity has been roughly flat according to The National Association of Home Builders. They reported that its November Composite Housing Market Index held stable with a downwardly revised October reading. Though the index remained double the low of 8 this past January there's been little, if any, improvement during the last several months. The index is compiled from survey questions asking builders to rate market conditions as “good”, “fair”, “poor” or “very high” to “very low”. The figure is a diffusion index, therefore, numerical results over 50 indicate a predominance of “good” readings.

The present sales index held stable at 17 which equaled the 3Q average. In the West the index rose slightly and was sharply higher than one year ago. In the South the index also held stable m/m (+41.7% y/y). In the Northeast the index fell m/m but remained three-quarters higher than the year-ago level. In the Midwest the index also fell m/m but remained double last year. The sub-index of sales during the next six months rose slightly m/m and offset most of the October decline. · The Home Builders' Association also reported that traffic of prospective buyers held stable with October at the lowest level since July.</p><p>The Home Builders' Housing Opportunity Index, which is the share of homes sold that could be considered affordable to a family earning the median income, fell slightly in the second quarter. It had jumped earlier to a record high of 72.5% buoyed by lower home prices, lower interest rates and higher income. (There is a break in the series from 2002 to 2003.)

The NAHB has compiled the Housing Market Index since 1985. The weights assigned to the individual index components are .5920 for single family detached sales, present time; .1358 for single family detached sales, next six months; and .2722 for traffic of prospective buyers. The results, along with other housing and remodeling indexes from NAHB Economics, are included in Haver’s SURVEYS database.