The Dow Jones industrial average climbed above 10,000 for the first time in a year yesterday (Oct. 14). What is causing the mood of investors to become more optimistic? It’s the trickle of good news on the economy that is starting to flow through the pipeline. The hope is that this will turn into a steady stream and eventually a river, but that is getting a little ahead of ourselves.

The Consumer Price Index

This recovery is a slow process. Take the latest inflation figures. They are only mildly better in September than in August. An improvement in this case means less of a decline. Deflation, which has been predominating since the beginning of the year, is not good for the economy.

The all-items inflation rate in September was -1.3%. In August, it had been -1.5% and in July, -2.1%. July’s figure was the steepest decline in the recession. It came about because the price of oil hit its peak in July, 2008. The inflation rate is gradually creeping back up to 0%.

Inflation sub-indices

The core inflation rate (which omits food and energy prices) was +1.5% in this latest September. Long term, the desirable rate of inflation is about 2.0%. This greases the wheels of industry. It makes it easier to pay back nominal loans. It causes peoples’ assets to increase in value.

The energy sub-index of the CPI has moved to -21.6%. At its most extreme, it was -28.1% in July. However, some prices have been moving upward. On a year-over-year basis, medical care commodities are +4.1% and medical care services are +3.3%.

The food price index is basically flat versus last year. Gasoline prices are -29.7% year over year.

Jobless claims

In other good news, the latest weekly report on initial jobless claims is down by another 10,000. The level now stands at 514,000, which is a significant improvement from 660,000 in mid-Q1 09. Continuing claims dropped back by 75,000 to stand below six million again after being much higher.  

All of these little gains are starting to add up and the stock markets are responding with enthusiasm.