Inflation Mild in November as Industry Output Declines

U.S. inflation remained mild in November as the industrial sector showed further signs of softness, bolstering expectations that the Federal Reserve may start cutting interest rates in the new year.

The consumer price index, the nation’s main inflation gauge, rose a moderate 0.2% in November for the second month in a row, the Labor Department said Friday.

Tobacco prices and air fares boosted the closely watched “core” CPI, which strips out food and energy costs. That index rose a slightly stronger 0.3% but economists said the underlying trend for prices would offer comfort to Fed officials, who will meet Tuesday to deliberate interest rates.

But amid the reassurance on the inflation front, a report that the Fed itself issued on Friday underscored concerns that the economy is rapidly downshifting.

In its monthly report on industrial activity, the Fed said production by the nation’s factories, mines and utilities fell 0.2% in November after a 0.1% drop in October. It was the first time since June and July 1998--when factories were buffeted by a global financial crisis--that industrial output has recorded back-to-back monthly declines.

The overall CPI gain in November matched the expectations of U.S. economists in a Reuters survey. Still, the core rate slightly exceeded the forecasts for a 0.2% rise.

That troubled the inflation-sensitive bond market, where yields rose in early trading but then pulled back again.

The report showed that tobacco prices surged 3.6% in November, a major reason for the strength in the core CPI. But the tobacco costs are related to lawsuit settlements against cigarette companies and are not seen as a symptom of inflation.

Most major CPI components were benign. Food costs were flat and energy prices, which have rocketed 16% the last year, gained only 0.1% in November. Housing prices and medical care costs edged up 0.2%, while apparel prices sank 0.4%.

While the latest inflation figures were tame, on an annual basis the CPI has been at the upper end of where many Fed officials would like to see it. In the 12 months ended in November, the CPI was up 3.4%, pushed higher by surging energy costs. The core CPI was up 2.6%.

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Consumer Price Index

Monthly percentage change, seasonally adjusted:November:

0.2%Source: Labor Statistics Bureau