U.S. September CPI Unchanged

Consumer prices in September were generally weaker than anticipated with the overall measure unchanged in the month rather than rising 0.1% as had been expected. This contributed to the year-over-year rate moderating to 4.9% from 5.4% in August. Core prices were also weaker than expected rising 0.1% rather than rising a projected 0.2% though this left the year-over-year rate unchanged at 2.5%.

The modest overall gain was helped by energy prices dropping 1.9% in the month. This largely reflected the housing fuels and utilities component dropping 2.8% following a 1.1% decline in August. Gasoline prices fell as well though only by 0.6% and compares to a 4.2% plummet in August. The slowing in the pace of decline in this component reflected the impact of Hurricane Ike which temporarily boosted prices because of the shutdown in refinery capacity in Texas. More sizeable declines in this component are expected to resume in October. Food prices continued to show large gains rising 0.6%. The modest rise in core prices was largely helped by a 0.7% drop in new car prices reflecting very weak demand and attempts by dealers to move the old car lines before the introduction of the 2009 models. Apparel prices were also down in the month though by a more moderate 0.1%.

In a separate report, jobless claims fell more than expected in the week ending October 11 to 461,000 from 477,000 the previous week. Expectations had been for a more moderate easing to 470,000. However, the four-week moving average remains high at 483,250 and that implies little easing in the pace of jobs losses in October from the 159,000 drop in payroll employment recorded in September.

The Fed will likely take encouragement from the moderate monthly gains in both the overall and core measure. The annual rate of increase for the overall measure remains high at 4.9% though this measure has been trending lower since a recent peak in July of 5.6%. These earlier strong annual increases have not been reflected in any noticeable upward trend in core prices with the annual rate holding steady at 2.5% over this period. This likely reflects the impact of slowing growth and easing labour market conditions that we generally expect to continue through the forecast period. In fact, our outlook for the Fed reflects the view that it will be concerned about a possible deepening in recessionary conditions, in the face of still tight credit, that will dominate policy actions. This will send Fed funds down another 50 basis points to 1.00% by the end of the year.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.