KEY INFLATION MEASURES STILL WEAK AS FED MEETS / THE WALL STREET JOURNAL

December 17, 2013, 9:56 AM ET

Key Inflation Measures Still Weak as Fed Meets

By Eric Morath

Both of the government’s consumer inflation measures are trending well below the Federal Reserve’s 2% target, complicating the central bank’s decision on whether to curtail its easy-money policies this week.
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The consumer price index advanced 1.2% in November from a year earlier, the Labor Department said Tuesday. The personal consumption expenditures price index, the Fed’s preferred gauge, increased just 0.7% in October from a year prior, according to a Commerce Department report earlier this month.

The weak inflation, which reflects soft consumption and wage growth, stands as a potential impediment to the Fed slowing the pace of its $85 billion per month in bond purchases. Policymakers are discussing the future of the program at their meeting Tuesday and Wednesday.

An improving labor market and a budget deal among Washington lawmakers has some economists forecasting that the Fed could announce a move to slow its bond buying on Wednesday.

Persistently weak inflation would support officials who favor of continuing the program into next year, particularly with evidence that prices could continue to rise very slowly. “Low inflation is one reason we don’t expect a Fed move to taper this week,” Wells Fargo Chief Economist John Silvia said prior to the release of Tuesday’s data.

While both inflation measures have been weak, the CPI has outpaced the PCE index for more than a year. That’s partly because the CPI places greater weight on housing prices. Shelter costs account for nearly a third of CPI versus only 15% of the PCE index.

Tuesday’s report showed shelter prices are up 2.4% from a year earlier — double the pace of overall inflation. The largest component of the shelter index, the estimated cost for homeowners to rent their house, rose 0.3% in November from October. That’s the largest monthly gain in five years.

Strong home sales and low interest rates helped increase both house prices and rents during much of the year, putting upward pressure on the CPI.

But that trend may not last. If interest rates move higher as a result of less Fed stimulus, home sales and price growth could slow.

In a recent paper, San Francisco Fed researchers said CPI growth is likely to ease further and fall in line with the PCE index as the housing boost fades.

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