Year-on-year growth in U.S. con­sumer prices fell to 3.6% in Octo­ber from 3.9% in Sep­tem­ber. Due to its sig­nif­i­cant con­tri­bu­tion of 32% to the over­all CPI, shel­ter con­tin­ues to keep the CPI in check with its year-on-year gain of 1.8%. The CPI exclud­ing shel­ter fell to 4.4% in Octo­ber from 5% in Sep­tem­ber on a year-ago basis. I was not sur­prised, though. More than 90% of the change in the CPI ex shel­ter with a one-month lag can be attrib­uted to the year-on-year absolute change in the price of crude oil as rep­re­sented by Light Louisiana Sweet.

Sources: I-Net Bridge; FRED; Plexus Asset Management.

The change in the oil price from a year ago indi­cates that the CPI ex shel­ter is likely to fall fur­ther to the 3.8–4% region in Novem­ber. Assum­ing that growth in the shel­ter PMI remains unchanged at 1.8%, it means the over­all CPI is likely to be in the vicin­ity of 3.2%, mark­ing the low­est year-on-year growth since April this year. It will mean that in Novem­ber the CPI will plunge by 0.27% from Octo­ber – the largest decline since Novem­ber 2008.

Pro­ducer price infla­tion is also rolling over. The change in the price of crude oil from a year ago indi­cates a fur­ther drop in the year-on-year growth rate of the PPI in Novem­ber and Decem­ber to approx­i­mately 5.5% is on the cards. That com­pares with 6.1% in Octo­ber and 7% in September.

Sources: I-Net Bridge; FRED; Plexus Asset Management.

I expect year-on-year growth in both CPI and PPI to mod­er­ate fur­ther to 2% and 3% respec­tively in the first quar­ter of 2012 should the oil price remain unchanged at cur­rent lev­els. I do not think the FOMC will be con­cerned about slow­ing infla­tion as real dis­pos­able income will ben­e­fit sub­stan­tially. An abrupt decline in both these gauges is unlikely unless the oil price falls out of bed. A sharp drop in the oil price will indi­cate global demand is falling and will in any event result in the FOMC act­ing aggressively.

Fur­ther­more, I expect the growth rate of the core CPI to accel­er­ate as its hon­ey­moon result­ing from a weak shel­ter CPI (con­tribut­ing approx­i­mately 38% to the core CPI) is over as the latter’s growth on a year-ago basis is catch­ing up with the growth in other com­po­nents of the index.

Sources: I-Net Bridge; FRED; Plexus Asset Management.

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Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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