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 1/16/08 For Dec 2007 | |||||||||||||||||||||||||
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Highlights
Consumer price inflation in December moderated at both the headline and core levels, favoring the Fed's likely interest rate cut on January 30. The overall consumer price index in December rose 0.3 percent, moderately strong but coming off the 0.8 percent spike in November. For December, the core CPI inflation rate increased 0.2 percent, after firming to 0.3 percent in November. The consensus had projected a 0.2 percent rise in the core rate for December. The December CPI is not yet back in the Fed's comfort zone but it is headed in the right direction.
Year-on-year, the overall CPI eased to up 4.1 percent in December from up 4.3 percent in November. The core rate was firmed to up 2.4 percent in December on a year-on-year basis from up 2.3 percent in November.
Once again, higher energy prices kept the overall CPI on the high side in December. In the non-expenditure category for energy, prices increased 0.9 percent, following a 5.7 percent surge in November. For December, motor fuel was up 1.1 percent; fuel oil up was up 2.0 percent; and piped gas & electricity was up 0.5 percent. Food price inflation eased in December with a 0.1 percent increase, following a 0.3 percent boost in November.
By expenditure category, on the high side in December were transportation, up 0.5 percent; medical care, up 0.3 percent; education & communication, up 0.3 percent; "other," up 0.3 percent; and housing, up 0.3 percent. Within housing, owners' equivalent rent held steady at 0.3 percent. By expenditure category, on the soft side were food & beverages, unchanged; recreation, unchanged; information, unchanged; and apparel, up 0.2 percent.
On an unrounded basis, the core CPI in December rose 0.24220 percent, compared to a rise of 0.27494 percent in November. On an unrounded basis, the headline CPI in December rose 0.28257 percent, compared to a rise of 0.79558 percent in November.
Today's report on the CPI is mixed but likely will not stand in the way of a Fed rate cut on January 30. The good news is that headline and core numbers came down from November's elevated rates. The bad news is that inflation is still well above where the Fed wants it. The Fed will still see some economic softness in the first half as helpful on the inflation front and that view will limit the aggressiveness of the Fed in cutting as much as many in the markets want. The Fed would like to avoid recession but the inflation numbers also mean the Fed would be happy with near flat growth for a few months. But for now, both bonds and equities should like today's numbers.
The consumer price index surged in November, up 0.8 percent overall with the core breaking a long streak of moderate 0.2 percent gains with a 0.3 percent rise. Year-on-year prices are elevated, especially the overall rate at an unwanted 4.3 percent. The core rate is at 2.3 percent, above the 2.0 percent Federal Reserve comfort limit. We can expect another bad headline number due to continued increases in oil prices. But if we get a strong core increase, it could undermine the Fed's ability to cut interest rates by 50 basis points as traders are now pricing into the markets.
CPI Consensus Forecast for December 07: +0.2 percent
Range: +0.1 to +0.6 percent
CPI ex food & energy Consensus Forecast for December 07: +0.2 percent
Range: +0.1 to +0.2 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. |
![[Chart]](chart_1.gif)
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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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