Lack of inflation in October leaves Fed free to act

11/16/2011 2:29 pm EST


Jim Jubak

Founder and Editor,

Consumer inflation declined in the United States in October by 0.1%. That was the first drop since June. The core inflation number, which excludes food and energy, climbed 0.1% in October.

I wouldn’t make too much of this number—for reasons that I’ll explain later—but it is good news. A decline in inflation, for whatever reason, gives consumers a bit more spending power going into the holiday shopping season.

The absence of inflation also means that the Federal Reserve can concentrate on stimulating the economy—QE3 anyone?--without the constraints imposed by worries about letting inflation get out of control. And there’s certainly nothing in these numbers to endanger the Fed’s pledge to keep its benchmark interest rate near 0% until mid 2013.

You don’t have to look far for the reason for the October drop in inflation. Energy prices fell 2% in October from September. That’s largely an artifact of the way that the Bureau of Labor Statistics conducts its price surveys. The government statisticians examine consumer prices during a single week in the month. In September that week happened to correspond to a small surge in gas prices—the major reason that inflation rose by 0.3% in September from August. In October the sample week saw prices considerably lower than those in that week in September.

I don’t think, therefore, that you can use the October drop to conclude that inflation is falling in the long run. But I think it is safe to say that inflation isn’t about to run out of control—and that deflation isn’t a danger either at the moment.

What’s called headline inflation climbed by 3.5% from October 2010. But core inflation, the number the Federal Reserve watches, rose at just a 2.1% rate from October 2010. The Fed’s inflation target is 2% or less.