Pricier food, rent offset falling gas prices

• CPI has risen 2.2% in the past 12 months
• Food price hikes 'are an almost perfect offset' for falling gas prices
• Bet on low inflation: Investors poured asome $283 billion into bond funds this year

As expected, the government said Thursday that rising food costs and higher rents offset a drop in gas prices last month, leaving consumer prices slightly higher in October compared with the previous month.

The Labor Department said the consumer price index rose a seasonally adjusted 0.1% in October, down from sharp gains of 0.6% in each of the previous two months.

In the past 12 months, prices increased 2.2%, just above the Federal Reserve's inflation target of 2%.

Food prices rose 0.2%, while gas fell 0.6%. Excluding the volatile food and gas categories, core prices increased 0.2% in October.

The cost of shelter, which includes rents, rose 0.3%, the most in more than four years. Clothes and airline fares also rose, while the price of new and used cars fell.

Wall Street seems convinced that inflation is deader than Marley's ghost in

A Christmas Carol

. Investors could be right.

And bonds will have a merry day Thursday since the government's latest report on its most-watched gauge of inflation for consumers appears to confirm Marley's passing.

The CPI covers everything from the apples you eat to the Apple products you use to call and email your friends.

"Increases in food prices are an almost perfect offset for gas prices going down," says Mike Montgomery, senior economist at IHS.

When prices aren't rising, the inflation-fighting Fed has little reason to raise interest rates. Higher rates are poison for bond investors. Bond prices fall when interest rates rise, making them less valuable and a lower-return investment.

The Fed is engaged in an unprecedented effort to boost economic growth and spur job creation. It is buying $40 billion of asset-backed securities every month, which is helping keep rates low.It's the Fed's third effort in as many years to help a subpar economic recovery and a jobless rate that has been stuck near 8% all year.

The Fed's hope is that lower interest rates will spur consumers and businesses to borrow for homes, factory expansions and other economic activity that kicks up growth.

There's a lot of money betting that rates will stay low: Investors have poured an estimated $283 billion into bond funds this year, according to the Investment Company Institute, the mutual fund trade group.

Even if the CPI skews higher, economists think the Fed will keep rates low. Sung Won Sohn, a professor of economics at Cal State University, thinks inflation will hit an annual pace of 3.6%. But he doesn't think the Fed will raise rates.

"Right now, they're more concerned with deflation than inflation," he says. Why? Even though the Fed's efforts to help the economy are potentially inflationary, a worldwide slowdown in economic growth, including recessions in parts of Europe and Asia, and the risk of another recession in the U.S. if the "fiscal cliff" isn't avoided is keeping demand for goods and services in check.

Without demand, prices don't rise. In fact, the fear is that retailers and wholesalers will cut prices to attract customers. And finding inflation would be like hunting down Marley's ghost.

Contributing: The Associated Press