Tame inflation gives Fed bond-buy ammo

WASHINGTON - Consumer prices in October barely changed for the third straight month, strengthening the Federal Reserve's hand at a time when it is defending a plan to boost the economy by buying more government debt.

Extraordinarily low inflation was a major impetus for the Fed program to spend $600 billion buying Treasury bonds. Wednesday's Consumer Price Index report from the Labor Department showed that inflation remains superlow.

A steep rise in gasoline prices drove the index up 0.2 percent in October, the fourth straight monthly increase.

Gasoline prices rose 4.6 percent last month, tracking a big rise in crude-oil prices. However, the price rise in the energy category was tempered by a modest 0.4 percent rise in electricity. Also, the cost of natural gas used by homeowners fell 0.4 percent.

Excluding volatile energy and food costs, core consumer prices were unchanged for the third straight month. In the past year, the core index has risen only 0.6 percent, the smallest 12-month increase since the index began in 1957.

Many Republican economists and lawmakers have criticized the Fed's bond-buying program, saying it could lead to runaway inflation.

"The data is definitely in the Fed's camp today and should help keep the Fed's critics at bay," said Christopher Rupkey, chief financial economist at Bank of Tokyo Mitsubishi UFJ Ltd. "There is nothing in this data that would push the Fed off its course of continuing to buy government securities. Inflation is getting closer to becoming deflation, and the recovery in housing seems to have been aborted."

A troublesome sign in the October report was a drop in prices for new cars and clothing.

While flat prices may seem like a good thing for shoppers, the Fed would like to see prices rise more quickly to keep deflation at bay. Deflation - a broad drop in prices - also means wages, stock market values, and housing prices fall.

"For now, the data continue to show that price declines, not increases, are the concern of the day," Dan Greenhaus, chief economic strategist at Miller Tabak & Co. L.L.C., said in a note to clients.