Consumer inflation holds steady

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NEW YORK (CNNMoney.com) -- Inflation pressures stayed steady in October, according to the government's key inflation measure released Thursday that matched economists' forecasts.

The Consumer Price Index, the broad measure of prices paid at the retail level, rose 0.3 percent in October. That matched both the increase in September as well as the consensus estimate of economists surveyed by Briefing.com..

The more closely watched core CPI, which strips out volatile food and energy prices, rose 0.2 percent in the month. That also matched the gain in September as well as economists' forecasts.

The inflation reading is particularly important for those trying to judge what the Federal Reserve will do with interest rates at its Dec. 11 meeting. While the Fed has cut rates at its last two meetings due to worries about a slowdown in the economy, concerns about inflation could keep rates unchanged at its next meeting.

The Fed is generally believed to be more concerned with core inflation readings than the change in overall prices, since Fed policy has only limited impact on food and energy prices. But in a statement that accompanied its last rate cut, the Fed policymakers said they were concerned with recent increases in energy and commodity prices, and that the risk of an economic slowdown was balanced by the risk of rising inflation.

Mark Vitner, senior economist with Wachovia, said that the report shows signs that inflation is getting out of the Federal Reserve's so-called "comfort zone." That comes when year-over-year core inflation readings are between 1 and 2 percent. Core CPI was up 2.2 percent in the latest reading after being up only 2.1 percent the previous two reports. Vitner expects that inflation will get worse in the coming months.

"Gasoline prices were barely higher in October. What's going to happen with the November report, when the seasonal adjustment expects gas prices to be falling. We're likely to look at a much larger period of inflation, with the headline number being above 4 or 5 percent," said Vitner.

He said he thinks this report will make it very difficult for the Fed to go ahead with further rate cuts, especially if oil prices stay high.

"We are not in their comfort range," he said. "It calls into question how much the Fed can cut interest rates. They're going to say 'It was hard to bring inflation down. Are we willing to give that up?'"