There's Still No Inflation

The number:

Headline October CPI of 0.2% came in basically in right around expectations.

Core (ex-food and energy) was a goose egg at 0%.

Nothing all that exciting, really.

Background: Analysts are looking for 0.3% on the headline and 0.1% on the core.

For more, we’ll just hand it over to Deutsche Bank, which argues that you shouldn’t get too worried about any disparity between today’s number and yesterday’s cool PPI:

We do not think yesterday’s PPI report will have that much bearing on this morning’s CPI because of different survey methodologies. Recall that the headline PPI rose 0.4%, but the core PPI unexpectedly fell -0.6% in the month. The core decline was mainly due to weak motor vehicle prices related to seasonal-adjustment of new model year pricing which happens every October. PPI passenger car prices declined -3.0% in the month while light truck prices dropped -4.3% in the month.

These declines occurred because the seasonal factors on motor vehicles assumed larger new model year price increases than what actually took place; therefore, in seasonally adjusted terms, there were price declines. We should not see a similar pattern in the CPI, because this new model year price adjustment is spread out over several months. Furthermore, we expect to see a reversal in the PPI next month because outsized October changes in PPI cars and light trucks are often reversed in the ensuing month. For example, when light truck prices collapsed -5.3% in October 2006 they rose 8.3% in November 2006. Excluding motor vehicles, the core PPI was up +0.2% in October, which is hardly deflationary especially when considering the continued gains in the earlier stages of processing which strongly suggest the current 1.5% year-over-year rate in the core PPI could double in the next year or so: core crude prices were up 2.1% in October and 25.8% over the past year; core intermediate prices were up 0.6% in October and +4.4% over the past year. In our view, the bottom line remains the same: despite monthly volatility in the core PPI, the underlying data are consistent with gradually higher core producer price inflation in the coming months.

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