Consumer prices remain low. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in September after rising 0.4 percent in August. Over the past year, the index decreased 1.3 percent (not seasonally adjusted). Last month’s rise in prices largely reflects a 0.8 percent rise in transportation prices and a 0.6 percent increase in energy prices. However, food prices declined 0.1 percent from August and 0.2 percent since the same time last year (these food price declines are surprising given the increases in transportation and energy prices, which usually affect food prices). This is first time in over forty years that food prices have fallen over a 12-month horizon. Core CPI, which measures inflation after removing food and energy prices, also remained stable, rising 0.2 percent in September. The Consumer Price Index for All Urban Wage Earners and Clerical Workers (CPI-W), which captures price changes for a subset of all urban workers and influences the cost of living adjustment (COLA), declined in third quarter of 2009 from the same period in 2008. The third quarter change in the CPI-W is used to calculate cost of living adjustment for Social Security benefits.  Since the law prevents a negative cost of living adjustment, the COLA will be set at zero in January 2010.  However, the Obama Administration has proposed an additional $250 payment to seniors, veterans, and people with disabilities, equivalent to a 2 percent increase in benefits for the average Social Security retiree beneficiary.

Real average earnings decline for second consecutive month. Real average hourly earnings fell 0.1 percent in September, the same decline as in the previous month. This change reflects a rise in inflation that was faster than wage growth (See Chart). Real average weekly earnings declined by 0.4 percent due to the decline in both hourly earnings and the average work week. During the past twelve months, real average weekly earnings increased by 2.5 percent because the increase in real average hourly earnings outpaced the decline in average weekly hours.

Capacity Utilization Rate ticks  up. The Federal Reserve released data on industrial production and capacity utilization. The capacity utilization rate—a measure of how much productive capacity industries are utilizing relative to their potential utilization—was up 0.6 percent in September, among industries as a whole, to bring the overall rate to 70.5 percent. This is still 10.4 percentage points lower than the average capacity utilization rate between 1972 and 2008. The capacity utilization rate for the manufacturing industry was up 0.7 percent in September, inching up to a total rate of 67.5 percent. However, this rate is 12.1 percentage points lower than the average utilization rate between 1972 and 2008. These capacity utilization figures suggest that GDP is far below its potential, another indicator of the severity of the recession. Industrial production rose by 0.7 percent across all industries in September (compared to a 1.2 percent increase in August). Production of motor vehicles and parts increased by 8.1 percent in September compared to a 6.1 percent rise in August. This partially reflects the success of the CARS (“cash for clunkers”) program.  The continued slack in capacity utilization and in the labor market indicates that there will be little upward pressure on prices in the near future.