Chicago manufacturing index drops in Oct.

Manufacturing activity in the industrialized Chicago area slumped in October, while inflation pressures increased sharply, according to a survey released Wednesday the National Association of Purchasing Management-Chicago.

The monthly business barometer of activity in northern Illinois and northwest Indiana, typically referred to as the Chicago PMI, fell to 49.7 this month, marking the third time this year that the index slipped below 50, NAPM-Chicago said.

Readings below 50 indicate a contraction in activity while numbers above that level show expansion.

The October reading, down from 54.2 in September, came in well short of market expectations. Economists surveyed by Dow Jones Newswires had estimated a reading of 53.0 this month.

The prices paid component of the index jumped to 74.7 in October, up from 59.0 last month, indicating significant inflationary pressure, NAPM-Chicago said.

"With broadening inflation and disappearing economic growth, the economy is more clearly entering a pattern of no-growth combined with rising inflation known as stagflation," NAPM-Chicago said in a statement.

The data came just hours before the Federal Reserve was to announce a decision on interest rates. The Federal Open Market Committee cut the benchmark federal funds rate half a percentage point to 4.75 percent last month, and most market participants expect a quarter-point cut Wednesday aimed at boosting the economy.