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Consumer prices in line
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October 19, 1999: 2:55 p.m. ET
Higher tobacco, apparel push September inflation rate to 0.4% gain
By Staff Writer M. Corey Goldman
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NEW YORK (CNNfn) - Consumer prices rose at the fastest rate in five months in September, but the gains were in line with expectations, allaying investors' concerns about another inflation-biting interest rate rise from the Federal Reserve.
The Labor Department said Tuesday consumer prices rose 0.4 percent last month, the third consecutive monthly rise. Excluding volatile food and energy costs, consumer prices rose 0.3 percent in September, also in line with forecasts, though above the 0.1 percent gain recorded in August.
While the report signaled that consumer prices are indeed on the rise, it didn't indicate the worst fears of market participants: that rising costs among manufacturers and other producers are making their way onto store shelves and into the service-based areas of the economy.
"There's still a little bit of inflation out there, but not too much to be worried about," said Bill Hornbager, a bond analyst with A.G. Edwards in St. Louis, adding that he expects these numbers will deter the Fed from raising rates at their next policy meeting Nov. 16. "I think they'll leave the tightening bias on but I don't think right now that they'll go," he said.
A warm reception
The overall CPI rise was the biggest one-month gain since April's 0.7 percent surge. On an annualized basis, overall inflation rose at a 2.6 percent pace in September, while the core rate gained 2 percent, just above August's 33-year-low of 1.9 percent.
Wall Street had considerable anxiety while awaiting the numbers because of the recent rout in stocks, which was fueled largely by investors' concerns about accelerating inflation and more interest rate increases from the Fed.
But the anxiety immediately turned into relief, with the Dow Jones industrial average surging more than 200 points by mid-morning and the inflation-prone 30-year benchmark Treasury bond rising 1/2 a point to yield 6.26 percent. Both stocks and bonds gave back some of their gains later in the day.
Apparel costs rose last month, though there are still bargains to be found
That's because, while prices were higher across the board there was no sign of excessive increases, as was suggested in a report Friday showing producers prices surged 1.1 percent in September.
"There is nothing to be scared of here," said Ian Shepherdson, senior U.S. economist with High Frequency Economics. "When you take out several one-time gains including apparel, tobacco and lodging, prices were almost unchanged."
Certainly, higher prices for tobacco and apparel did lift the index in September. Tobacco prices rose 6.5 percent last month while apparel prices gained 1.2 percent. Prices for food, shelter and transportation also rose on the month.
Some price declines
On the flipside, airline fares and recreation costs declined in September, as did prices for personal computers and accessories - an obvious consumer product that has fallen dramatically in price in the past two to three years.
Apple Computer Corp. (AAPL) earlier this month announced a new under-$1,000 price tag for its popular iMac desktop computer. It also reported lower fourth-quarter earnings, though the profit decline was related to shipping problems and not lack of demand for its products.
And 3Com Corp. (COMS) announced earlier this month that it slashed prices on its least expensive hand-held organizer, the Palm IIIe, to better compete with Handspring's new Visor organizer. 3Com reduced its price to $179 from $229.
Those kind of price declines are what's keeping the overall inflation rate low and keeping financial markets happy, said Sherry Cooper, chief economist of Toronto-based brokerage Nesbitt Burns Inc. At the same time, the pace of inflation is "not restrained enough to fully soothe the Fed's rising inflation concerns," she said.
What will the Fed think?
Fed officials have lifted their trend-setting fed funds target rate twice this year - two quarter-point rises in June and August - to slow the economy and keep inflation from accelerating. The opted to leave rates unchanged at their last policy meeting on Oct. 5. The rate is currently 5.25 percent.
At the same time, Fed Chairman Alan Greenspan and others on the Fed board have allowed the economy to grow at a quicker pace than in the past because inflation was not posing a threat.
Indeed, when averaged out over the long term and compared, consumer prices have risen at a significantly slower pace this decade than last. Inflation averaged a little more than 5 percent a year through the 1980s, according to Labor Department figures; in the 1990s consumer price gains have averaged around 2.8 percent, less than half.
That's something Fed officials have been taking into account when determining monetary policy - that productivity gains have kept producers' costs low and, in turn, consumer prices from accelerating. The Fed's policy-setting Open Market Committee next meets Nov. 16 to discuss monetary policy.
In a separate report, the Commerce Department said new housing construction fell about 3 percent to a seasonally adjusted annual rate of 1.62 million units in September from a revised 1.67 million units in August. Analysts had expected housing starts to decline to 1.64 million units. 
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