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 2/20/08 For Jan 2008 | |||||||||||||||||||||||||
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Highlights
Consumer prices definitely heated up in January, bad news for a Federal Reserve that has dramatically cut interest rates. The CPI rose an uncomfortable 0.4 percent for a second straight month, putting the year-on-year rate at 4.3 percent -- the highest level in 2-1/2 years. The markets could overlook this pressure were it not for a 1 tenth increase in the core rate to 0.3 percent -- the highest reading in a year-and-a-half -- which brings the year-on-year rate for this reading to 2.5 percent and its highest level in a year.
Food and energy costs were both up 0.7 percent in the month, putting the year-on-year rate for food at 4.7 percent and the year-on-year rate for energy to a crushing 44 percent. This is bad news for the consumer who is struggling with basic bills not to mention the jobs market. Other categories showed wide increases especially transportation and medical care which were both up 0.5 percent.
Treasury yields jumped on the data though the dollar held steady. This report is likely to eat away at the bond market through the session, erosion that will likely hurt stocks. Expectations for further rate cuts by the Fed are still in place, but further increases in prices, such as the ongoing spike in oil, will increasingly limit the Fed's maneuvering room.
The 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. Based on year-on-year gains in December, inflation has a good ways to come down to meet the Fed's goal for inflation in a 1-1/2 percent to1-3/4 percent range. Year-on-year, the overall CPI stood at up 4.1 percent in December while the core rate was up 2.4 percent. More recently, a January spike in import prices suggests that we may not get the softening in CPI inflation that the Fed is hoping for.
CPI Consensus Forecast for January 08: +0.3 percent
Range: +0.2 to +0.3 percent
CPI ex food & energy Consensus Forecast for January 08: +0.2 percent
Range: +0.2 to +0.3 percent
![[Chart]](chart.gif)
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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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