By Timothy R. Homan Oct. 15 (Bloomberg) -- The cost of living in the U.S. rose at a slower pace in September, showing inflation will not be a threat as the economy emerges from the worst recession since the Great Depression. The 0.2 percent gain in the consumer-price index followed a 0.4 percent increase in August, as forecast, figures from the Labor Department showed today in Washington. Excluding food and energy costs, the so-called core index also climbed 0.2 percent, more than anticipated and pushed up by health care and a rebound in auto prices. Rents dropped for the first time in 17 years. The worst economic slump since the 1930s has left unemployment at a 26-year high and record levels of homes sitting vacant, signaling companies and landlords will hold the line on prices in coming months. The lack of inflation may give the upper hand to the Federal Reserve policy makers who’ve said the central back can keep interest rates low for a long time. “Inflation remains muted,” said Jennifer Lee, an economist at BMO Capital Markets in Toronto. “There is still much excess capacity to absorb, retailers are still fighting for their share of consumers’ shrinking wallets.” Manufacturing in the New York region expanded in October at the fastest pace in five years, reinforcing signs that factories are helping pull the economy out of the recession. The Fed Bank of New York’s general economic index soared to 34.6 from 18.9 in September, the bank said today. Readings above zero for the Empire State index signal manufacturing is growing. Futures Fall Stock-index futures trimmed earlier losses after the reports. The contract on the Standard & Poor’s 500 index was down 0.4 percent to 1,082.9 at 9:05 a.m. in New York. It was down 0.7 percent earlier in the day as earnings at Goldman Sachs Group Inc. disappointed some investors. Treasury securities fell. Economists forecast consumer prices would rise 0.2 percent, according to the median of 79 projections in a Bloomberg News survey. Estimates ranged from a decline of 0.2 percent to a gain of 0.5 percent. The number of Americans filing first-time claims for unemployment benefits dropped last week to the lowest level in nine months, indicating the improving economy is leading to a slowdown in firings, another Labor Department report also showed. Applications fell by 10,000 to 514,000 in the week ended Oct. 10, lower than forecast, from a revised 524,000 the week before. The total number of people collecting unemployment insurance also decreased. 12-Month Drop Compared with a year earlier, consumer prices were down 1.3 percent. For the core index, prices climbed 1.5 percent from September 2008 after a 1.4 percent increase in the 12 months ended in August. Energy costs increased 0.6 percent in September as the cost of gasoline climbed 1 percent. Gasoline prices in September averaged $2.55 a gallon, compared with $2.62 in August, according to AAA. Regular pump prices so far this month have averaged $2.47. Food prices, which account for about a seventh of the CPI, decreased 0.1 percent in September, reflecting cheaper meats and produce. Lower food prices are dragging down revenue at some businesses. Spartan Stores Inc., which distributes groceries and runs supermarkets, said lower prices are hurting sales. Food Prices Dennis Eidson, the Grand Rapids, Michigan-based company’s chief executive officer, said yesterday in a statement that he expects weakness for the remainder of its fiscal year due to “product price deflation” as consumers “behave cautiously given the challenging economic environment.” The gain in the core index was led by climbing health-care costs, which were up 0.4 percent, and a rebound in automobile prices following the expiration of the “cash-for-clunkers” plan. New vehicle prices increased 0.4 percent, while the cost of used vehicles jumped 1.6 percent. The administration’s clunkers initiative gave buyers as much as $4,500 for trading in older models for new, more fuel-efficient autos. Last month the Labor Department said those sales were considered as discounts off purchase prices. Rents Decrease Rents, which make up almost 40 percent of the core CPI, fell. Owners-equivalent rent, one of the categories used to track rental prices, decreased 0.1 percent, the first drop since 1992. The CPI is the broadest of the three monthly price gauges from the Labor Department because it includes goods and services. A report yesterday showed the cost of imported goods rose 0.1 percent, less than forecast. The government is scheduled to release its wholesale-price index on Oct. 20. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets. Fed Vice Chairman Donald Kohn this week said inflation and growth will probably stay below the central bank’s objectives for some time, warranting low interest rates for an “extended period.” His concerns echoed those of New York Fed President William Dudley. In contrast, Kansas City Fed President Thomas Hoenig and Fed Governor Kevin Warsh have been among those saying rate increases may happen sooner, or with more force, than some investors anticipate. The minutes of the policy-making Federal Open Market Committee’s Sept. 22-23 meeting yesterday showed officials weighed the risks that an anemic recovery would lead to “subdued and potentially declining wage and price inflation.” To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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