Inflation Picks Up, but Trend Remains Soft U.S. consumer prices rose in October amid an across-the-board uptick in a variety of services and major categories, but economists are divided on what that means for a still-weak underlying trend.

The consumer-price index rose a seasonally adjusted 0.2% in October, after two months of declines, the Labor Department said Tuesday. Excluding the volatile food and energy categories, so-called core prices grew 0.2%, the same as in September.

From a year earlier, overall prices rose just 0.2%, largely held down by a 17.1% year-over-year decline in energy prices.

Core prices have risen 1.9% on the year, led by increases in the cost of shelter and medical care. A strong dollar has made imports cheaper, lowering the price Americans consumers pay for many goods made overseas. (…)

Increases in the price index for a variety of services ranging from medical care to lodging to airline fares drove up core inflation, offsetting declining prices for goods like apparel. (…)

Richard Moody, chief economist at Regions Financial Corp. shared a similar sentiment. “The underlying theme of the inflation data remains the same—divergent paths for services prices and goods prices, few sources of sustained upward price pressures outside of rents, and little prospect of headline inflation returning to 2.0 percent any time soon.” (…)

Mr. Moody’s comments seem a good reflection of the general mood on inflation. Brent oil is still 45% below its level one year ago…but not for long:

But unless oil keeps sliding, the energy effect will soon dissipate and total CPI will begin to resemble a lot more to the real underlying inflation:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.5% annualized rate) in October. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.5% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Over the last 12 months, the median CPI rose 2.5%, the trimmed-mean CPI rose 1.9%, the CPI rose 0.2%, and the CPI less food and energy rose 1.9%.

However one looks at it, core, underlying inflation, is in the 2.5% range. Remember my trivia question on Eurozone inflation report 2 days ago?

Trivia question: What was the annualized rate of core inflation in the Euro area during the last 3 months:

1.   0.0%
2. –1.0%
3. +0.7%
4. +4.1%

Hint for you: Just last week, European Central Bank President Mario Draghi expressed concern that core inflation in the eurozone may be backsliding.

The right answer is 4: +4.06% with the last 3 months being +0.3%, +0.5% and +0.2% MoM respectively.

In the meantime, if retail gasoline prices decline to $1.95 in December as per current gasoline futures, then consumer spending on gasoline is likely to decline to roughly $250B versus $420B a couple of years ago (ISI calculations). This -$170B decline is roughly 1.5% of consumer spending. That’s a lot of slack!

U.S. Industrial Production Falls 0.2% in October U.S. industrial production declined in October as the continuing slump in crude oil prices weighed on oil drilling and milder-than-usual weather tamped down electricity use.

Industrial production fell a seasonally adjusted 0.2% in October from a month earlier, the Federal Reserve said Tuesday. That followed a 0.2% decline in September.

Capacity utilization, which measures slack across industrial firms, fell in October to 77.5% from September’s revised reading of 77.7%. (…)

Manufacturing output grew 0.4% after dropping 0.1% in September, although the growth wasn’t strong enough to offset the effects of the sharp decline in oil prices since mid-2014 that has caused energy companies to scale back drilling. That contributed to a 1.5% drop last month in mining output. Utilities fell 2.5%, driven by a decline in output from electric utilities which economists attributed to unusually warm weather. (…)

Overall industrial output in October was up a modest 0.3% from a year earlier. The sector remains under pressure from weaker global demand and from the stronger U.S. dollar, which makes exports more expensive. (…)

Home-Builder Confidence Declines U.S. builders’ confidence in the housing market declined this month but remained near a 10-year high, suggesting the industry is sustaining momentum despite troubles in the global economy.

The National Association of Home Builders’ housing-market index fell three points to 62 in November, the industry group said Tuesday.

October’s reading, revised to 65 from an initially reported 64, marked the highest level since October 2005, during the last housing boom.

The latest survey showed that a measure of builder expectations for sales over the next six months fell five points to a still relatively high 70. A measure of present sales conditions declined three points to 67.

The index’s final component, a measure of buyer traffic, rose a point to 48.

• The Percentage of Mortgages Entering Foreclosure Is at its Lowest Level Since 2005 The housing market isn’t finished cleaning up the legacy of the foreclosure crisis, but it is mostly finished claiming new victims.

China property: good things come Prices appear to have stabilised, but not across the board

(…) New-home prices rose in roughly one-third of the 70 cities surveyed compared with rises in 39 last month; prices fell in 33 cities, too, more than in September. This should not be surprising. Completed floor space available for sale is at a record high, sufficiently worrisome for Xi Jinping, China’s president, to highlight its reduction as a policy focus.

Still, as transaction volumes pick up, this overhang looks less concerning. Based on current activity, Barclays estimates that existing inventory will last eight months in 13 major cities it tracks. That has fallen from close to 10 months at the end of October, and from 14 months earlier this year. While this metric depends on demand holding firm, current data imply that, in the longer term, supply is also set to moderate as investment in residential housing continues to fall. In the 10 months to October, floor space for newly started properties dropped 15 per cent year-on-year, said the NBS.

A newfound discipline is clear in some developers. In recent weeks, several listed companies including China Resources Land, Country Garden and Longfor Properties reportedly pulled out of bids for new land, deeming prices too high. According to Jefferies, property prices would have to rise 20 to 30 per cent for the margins to be healthy.

Current levels of activity suggest such price rises may take some time to materialise. Still, with authorities cheering the sector on, it is no longer out of the question.

Home prices rose by 0.07% in October from September, following the 0.20% gain recorded in September and a 0.17% increase in August, according to calculations from The Wall Street Journal based on data from the National Bureau of Statistics. On a year-over-year basis, the decline in home prices continued to narrow in October, falling 1.1% from September’s 2% decline. (…)

Bloomberg has more on this here.

Other facts on China:

• Chinese electricity consumption dropped to -0.4% YoY in October, vs. -0.2% in September. Seasonally adjusted, October was flat MoM.
• JD, Alibaba’s top rival, reported 3Q sales up 52% YoY vs Alibaba’s 32%.

• China’s rail freight drops faster in October A slump in China’s railway freight volume, an indicator of economic activity, picked up pace in October, the country’s top economic planner revealed on Wednesday.

The railways carried 280 million tons of cargo in October, down 16.3 percent year-on-year, compared with a fall of 15.6 percent in September and 15.3 percent in August, according to data released by the National Development and Reform Commission (NDRC).

In the first 10 months of 2015, rail freight slipped 11.9 percent from a year earlier to 2.8 billion tons, a sharper decline than the 11.4-percent decrease for the first nine months, the NDRC said. (…)

This headline is getting considerable media attention today:

China’s Economy Faces Considerable Downward Pressure, Xi Says

Yet, Xi did not say anything earth shattering:

“In general, China’s positive economic fundamentals and long-term trajectory remain unchanged,” Xi said, taking the stage after U.S. President Barack Obama. “On the other hand, China’s economy is still coping with the complicated internal and external environment, considerable downward pressure and the temporary pain of deep reforms.”

“Some economic indicators have somewhat fluctuated between months and quarters, but the overall economy has operated within the reasonable range and maintained steady and fairly rapid growth,” Xi said.

China, Japan Shed U.S. Treasury Holdings The top buyers of U.S. government debt are shedding their holdings at the fastest pace in months, even as global investors prepare for the U.S. to raise interest rates in coming weeks.

China, the largest foreign holder of U.S. Treasurys, reduced its holdings to the lowest level in seven months to $1.258 trillion in September while Japan cut its holdings to $1.17 trillion, the lowest in almost two years, U.S. Treasury data showed. The data runs with a two-month lag. (…)