Consumer Price Index Declines

Cheaper energy helped pull overall consumer prices down steeply in September and new-home building unexpectedly rebounded, implying a still-resilient economy.

The promising government economic data Wednesday bolstered investors’ hopes for stronger corporate profits and convinced analysts that the Federal Reserve would keep interest rates on hold as it gauges the effect of cheaper energy on inflation expectations.

The Labor Department said overall U.S. consumer prices dropped 0.5% in September after rising 0.2% in August. But core prices, which exclude food and energy, crept up 0.2% for a third consecutive month, enough to keep inflation risk at the forefront as a potential worry.

The Commerce Department said housing starts hit an annual pace of 1.77 million units in September, compared with an upwardly revised 1.674-million pace in August.

The scope for a housing pickup seems limited, however, because permits for future groundbreaking, which serve as a gauge of builders’ optimism, fell 6.3% in September to 1.619 million units a year, the lowest rate since October 2001.

The core consumer price index “was as expected, but it is still a bit too hot for the Fed’s liking,” said Alex Beuzelin, a foreign exchange market analyst for Ruesch International Inc. in New York. “They aren’t doing anything to alter the view the Fed is on hold at present with the potential option for further policy tightening if inflation pressures don’t moderate.”

During the first nine months this year, the core inflation rate rose at a 3% annual rate, well above the 2.2% recorded for all of 2005.

That appears above any Fed “comfort zone” for price gains, although in its last rate decision Sept. 20 the Fed said “inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices” that should contain inflation expectations.

A Reuters poll of the 22 primary dealers -- big Wall Street firms that deal directly with the Fed -- found that two-thirds thought the Fed’s next rate move would be a cut.

But they were widely split on when it might happen, and none anticipated one before December at the earliest.

The inflation data came ahead of the Oct. 24-25 gathering of the Federal Open Market Committee to consider interest rate policy.

In recent speeches, Fed officials have made it clear that they are closely monitoring inflation risks, and as a result market expectations are that interest rates will be held steady through this year.

Economists had forecast September housing starts would edge down to 1.64 million units from the originally reported August pace of 1.665 million.

In the inflation report, the 0.5% plunge in September overall consumer prices was the first decline since December and was the largest since November, when they dropped 0.7%.

Energy prices tumbled 7.2% in September, their biggest decline since an 8.1% drop in November, after a 0.3% rise in August.

The report on consumer prices was the second key inflation measure in two days, after Tuesday’s producer price report that showed overall wholesale prices down 1.3% in September on a record drop in gasoline prices. However, core producer prices, which exclude food and energy, rose 0.6% last month.