WORTHINGTON, Ohio -- As gasoline prices continued to drop during the past two weekssubsequently driving down prices for other goods and serviceconsumer confidence increased, according to a new survey, but economists are slow in letting their guard down as they note underlying data signals that thereare inflation hazards ahead.
According to the BIGresearch October Consumer Intentions & Actions Survey, consumer attitude toward the economy continued to improve in October. Almost 50% of the 7,623 consumers in the survey said they were confident [image-nocss] or very confident in chances for a strong economy in the next six months, which is up from 43.4% in September.
Joe Pilotta, vice president of research for Worthington, Ohio-based BIGresearch, said, "Greater confidence in the economy ... usually translates into greater spending for the holidays," according to a story from the Center for Media Research.
The impact of gas prices are also lower as more consumers are saying fluctuating gas prices are having no major impact on their spending, 29.3% vs. 24.4% last month. And consumers are also anticipating lower pump prices at Thanksgiving than they previously expected in September. They anticipate the price of a gallon of gas will be $2.55 by Thanksgiving, which is almost $0.30 less than last month when they anticipated the price to be $2.84 a gallon.
"Consumer expectations are the basis for action, lower price, more cash and greater spend," said Pilotta.
Meanwhile, The Wall Street Journal reports that consumer prices fell 0.5% in September, led by a 13.5% plunge in gasoline prices, according to the Labor Department. Excluding food and energy, the department's "core" measure of consumer prices rose 0.2% for the third consecutive month. This measure is closely monitored by Federal Reserve policy makers because it gives a clearer picture of underlying activity.
The fact that the sharp drop in energy costs trickled into the September consumer-prices report came as no surprise. Economists instead homed in on the year-over-year increase in the core inflation rate. Many economists said the modest rise in core prices is another sign that inflation is retreating enough to dissuade the Federal Reserve from changing interest rates anytime soon. "We may have seen the peak of this inflation scare," Mark Vitner, a senior economist at Wachovia Corp., Charlotte, N.C., told WSJ.
The latest figures tentatively suggest that the economic scenario of slower expansion and reduced inflation sought by the Fed is playing out. "We are in the midst of a near picture-perfect soft landing," said Bernard Baumohl, executive director of the Economic Outlook Group, Princeton Junction, N.J. "What's most interesting from the latest set of reports is that this economy may be ready to take off again by mid-2007."
Price gains could reaccelerate if gasoline prices rebound or the economy gains more momentum, and inflation is far stronger than the Fed would like it to be. The Labor Department's measure of core consumer prices in September was up 2.9% from a year ago, outpacing the 2.1% rise in prices overall. Similarly, the Commerce Department's core price indicator, the personal-consumption expenditure price indexthe Fed's preferred inflation gaugerose 0.2% in August and was 2.5% higher than a year earlier.
Both measures show core inflation running at its fastest clip in more than 10 years, and well above the Fed's presumed comfort zone of between a 1% and 2% rate. The Fed has indicated it can tolerate higher-than-usual levels of core inflation for the short term, but any further acceleration could prompt it to raise interest rates.
For now, the plunge in oil prices and the slowdown in economic expansion appear to be having an impact. After rising at an annual rate of more than 3.5% in the second quarter, core inflation increased at a slower 2.9% in the third quarter.
Speaking last week, San Francisco Fed president Janet Yellen said: "Although I'm somewhat encouraged that various measures of core inflation have edged down recently, it's clear that more progress is needed."
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