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 2/21/07 For Jan 2007 | |||||||||||||||||||||||||
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Highlights
In January, the consumer price index slowed overall but the core firmed significantly. Overall consumer prices slowed to a 0.2 percent rise in January, following a 0.4 percent jump in December. The moderation was primarily due to weaker oil prices bringing energy inflation down. January's increase was a little above the market forecast for a 0.1 percent rise. The core CPI, however, rose 0.3 percent, following a 0.1 percent increase in December. The core rate was above the market forecast for a 0.2 percent increase. The overall CPI was higher than expected due to sharp increases in food prices - the markets appear to have forgotten to take into account earlier spikes in the food PPI. Year-on-year, the overall CPI is at 2.1 percent while the core is at 2.7 percent.
There were a number of special movers in today's report. Additionally, the firming the core may not be as scary as just the overall figure might imply. Energy prices moderated the overall CPI as expected. In the non-expenditure category for energy, prices fell 1.5 percent, following a 4.2 percent spike in December. Fuel oil fell 4.4 percent while gasoline prices declined 3.0 percent. Energy costs are down 3.1 percent on a year-on-year basis.
Other key movers by expenditure categories included food and beverages, which spiked 0.7 percent in January after a 0.1 percent dip in December. Leading the jump was fresh fruits & vegetables (+1.3%) and dairy (+1.3%). CPI strength was seen in some components not seen recently. Medical care surged 0.8 percent in January, "other" jumped 0.8 percent, and apparel rose 0.3 percent. The "other" category was led by a 3.1 percent spike in tobacco prices. The apparel figure stands out because it is a contrast with recent declines. Housing - the usual suspect when the core jumps - actually was moderate with a 0.2 percent gain - including a 0.2 percent rise in owners equivalent rent. Transportation fell 0.8 percent in January, pulled down by a 3.0 percent drop in motor fuel as well as by a 0.2 percent dip in new & used motor vehicle prices.
Of note regarding the core CPI, the 0.3 percent gain was rounded up from 0.25565 percent. While the core did not head in the right direction, the unrounded number is not as scary - also noting that such as tobacco helped push it up. Still the medical component jump is a reminder that we need to worry about not just owners equivalent rent. However, prescription medications often have published price hikes in January and it is difficult to seasonally adjust.
Today's report is a reversal of recent improvement in inflation indicators and certainly keeps the Fed on hold. Neither the bond markets nor equity markets will like today's report.
The consumer price index jumped 0.5 percent in December, following no change in November. The December surge was primarily related to a spurt in oil prices. The core CPI came in at a more moderate 0.2 percent gain, following no change in November. Recently, Fed Chairman Bernanke noted that core inflation has eased but that the monthly numbers can be erratic. So, markets will be watching to see if the core number brings the trend down or not. Also, Bernanke noted some very recent improvement in the owners' equivalent rent subcomponent of the core CPI-the largest subcomponent. This series still rose 0.3 percent in January but needs to come down more for the trend in the core CPI to be within the Fed's preferred inflation range.
CPI Consensus Forecast for February 07: +0.1 percent
Range: -0.3 to +0.3 percent
CPI ex food & energy Consensus Forecast for February 07: +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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