Inflation tame; jobless claims rise

U.S. consumer prices rose briskly last month on energy costs, but aside from volatile energy, inflation was largely contained, possibly leaving room for the Federal Reserve to cut interest rates to bolster a slowing economy.

A second government report Thursday showed an unexpectedly steep rise in initial claims for jobless benefits last week, a suggestion that the labor market is softening as the economy lumbers under the weight of a housing downturn, tighter credit and higher energy prices.

The consumer price index, the most broadly used gauge of inflation, rose 0.3% in October for a second straight month as energy prices posted their biggest rise since May.

But core prices, which strip out volatile energy and food costs, rose a more modest 0.2%. Both the overall and core readings were in line with financial market expectations.

Core inflation was held in check by falling prices for new and used vehicles and household furnishings. Shelter costs, which make up almost a third of the price index, advanced more slowly than in recent months.

The moderate core inflation reading may give the Federal Reserve some breathing room as it decides whether further interest rate cuts are necessary to counter financial market turbulence and a worrisome housing downturn.

“The CPI data was ‘tame’ enough that it clears the way for the Federal Reserve to lower interest rates again,” said Sean Broderick, an analyst at Weiss Research Inc. in Jupiter, Fla.

Although policymakers pay close attention to core inflation measures, the Fed signaled this week that it would be paying more heed to overall inflation as it projects economic trends further into the future.

“Ultimately, households and businesses care about the overall, or ‘headline,’ rate of inflation. Therefore, the [Fed] should refer to an overall inflation rate when evaluating whether the committee has met its mandated objectives over the long run,” Fed Chairman Ben S. Bernanke said Wednesday.

The data Thursday showed the effect of higher food and energy prices over recent months.

Consumer prices were 3.5% higher than a year ago, the biggest 12-month increase since August 2006 when they rose 3.8%, a Labor Department official said. Core prices were up 2.2% on a year-on-year basis.

So far this year, prices have climbed by a seasonally adjusted annual rate of 3.6%, driven by higher food and energy costs. That compares with a 2.5% gain in 2006.

Energy costs have surged at a 12.3% rate this year, more than four times as high as the 2.9% gain in all of last year. Food prices have increased at a 5.5% annual rate in 2007, compared with a 2.1% rise in 2006.

A separate Labor Department report showed that new applications for jobless aid rose more than expected to a seasonally adjusted 339,000 last week, and the more-reliable four-week moving average held steady at a six-month high.

Initial claims for state unemployment insurance benefits rose by 20,000 from an upwardly adjusted 319,000 the week before.

Reports from the New York and Philadelphia Federal Reserve banks also suggested that the economy was softening.

A report from the New York Fed showed that manufacturing sector growth in that state slowed in November, with new orders and inventory activity weakening and material costs surging.

Another report, the Philadelphia Fed survey of business conditions, showed that factory activity in the mid-Atlantic region jumped in November but employment fell and companies’ forecasts for the future darkened.