The Consumer Price Index is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation. Why Investors Care
| Released on 4/20/05 For Mar 2005 | |||||||||||||||||||||
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Highlights
Talk Wednesday will center on the core CPI, which rose a sharp 0.4% in March but a less uncomfortable 2.3% on the year. Rounding does take a bit of the sting out of the monthly increase, as the unrounded change was 0.351% vs. February's unrounded change of 0.251%.
Rounded or not, the monthly core rate is an eye-opener, indicating that price pressures for consumer goods are building.
Gasoline prices shot up 7.1% in the month, which is bad news however unsurprising. The CPI excluding gas rose a not-so-tame 0.3% while the CPI excluding all energy products (fuel oil, electricity, natural gas) rose 0.4% -- both confirming the presence of widening price pressures. Food prices were up a tame 0.2%.
The total CPI rate, which will make newspaper headlines tomorrow, shot up 0.6% in the month though the year-on-year rate is a less terrifying 3.1%.
Housing prices rose a sharp 0.5% in the month as did medical costs and education costs. Apparel prices, which over the last half year have been rebounding from a long-term decline, rose 0.8%. Hotel costs jumped 3.9% in the month, while transportation costs rose 1.9% reflecting higher airfares.
Showing less pressure were tobacco prices, up 0.1%, and vehicle prices, down 0.4% for new vehicles and up only 0.1% for used vehicles. Vehicle prices may be a plus for overall inflation, but the news is very bad for GM and Ford, which are staggering under big losses and whispers of bankruptcy.
Vehicles and cigarettes aside, March's CPI showed wide increases reflecting the pass-through of rising energy costs. The results, in combination with last week's sharp rise in import prices and yesterday's less-than-tame PPI report, are no doubt giving Federal Reserve policy makers headaches this morning.
Yields in the bond market rose sharply in immediate reaction to the results, about 10 basis points on the 2-year Treasury and about 8 basis points on the 10-year. Inflation, and the higher interest rates that policy makers use to fight it, are bad for both bonds and stocks. The dollar, however, may benefit through the day, though initial reaction was muted.
The consumer price index increased 0.4 percent in February with a modest increase in food prices but a sharp 2 percent increase in energy prices. The core CPI rose 0.3 percent for the month. Gas prices have surged in March and this should boost the total CPI, although economists are not looking for any acceleration in the core components.
CPI Consensus Forecast for Mar 05: 0.5 percent
Range: 0.3 to 0.7 percent
CPI ex food & energy Consensus Forecast for Mar 05: 0.2 percent
Range: 0.1 to 0.3 percent
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It is always a good idea to look at more than a few months of data to get a sense of changes in established trends. Monthly changes in the CPI are mainly volatile because of sharp fluctuations in food and energy prices. The core CPI eliminates the sharper fluctuations. |
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Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation. Even with the smoother trend, note that the core CPI does not fluctuate as much as the total CPI. |
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