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 3/14/08 For Feb 2008 | |||||||||||||||||||||||||
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Highlights
Consumer prices in February shocked the markets on the downside with both the headline number and core CPI coming in at unchanged. This paves the way for the Fed to make a major rate cut next week. The consensus had expected a 0.3 percent increase in the overall CPI and a 0.2 percent rise in the core rate. Overall, the data confirm that weakness in the consumer sector is having an impact on damping inflation.
While today's CPI is going to get the markets very excited about inflation appearing to have come down sharply, the better view is probably that the last two months have been aberrations somewhat with January overstating inflation and February understating. January had been notably strong with headline and core numbers coming in at 0.4 percent and 0.3 percent, respectively. Trend inflation is likely in between the two months.
What pulled February so low? Helping to ease core inflation were apparel, down 0.3 percent, and new & used motor vehicles, down 0.2 percent. Also, medical care was very soft with a 0.1 percent rise, following a sharp 0.5 percent surge in January - another argument that "true" inflation is somewhere in between the two months. Also helping to flatten the headline number was a 0.5 percent drop in energy costs, led by a 2.0 percent drop in motor fuel and a 1.2 percent fall in heating oil.
Year-on-year, the overall CPI eased to up 4.1 percent in February from up 4.4 percent in January. The core rate was slipped to up 2.3 percent from up 2.5 percent the prior month.
February's low CPI numbers are welcome relief to the markets and to the Fed. The Fed will still see underlying inflation a high for now but likely keeping its forecast for inflation to ease. The Fed will feel it has much more latitude for rate cuts to preclude recession. But looking ahead, there clearly still is upward pressure on both energy and food prices as seen in the commodity markets. Markets should celebrate today with boosts in equities and possibly even the dollar. Rates should ease a bit due to lower inflation numbers - but outflow into equities could nudge rates higher.
The consumer price index continues to give the Fed grief as a long-term problem that may be getting worse while the Fed fights a potential recession. More than anything else, the Fed would like to see some soft inflation numbers to help keep inflation expectations anchored and allow more aggressive interest rate cuts to boost economic growth. But consumer prices definitely heated up in January as 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 core rate headed in the wrong direction, rising 1 tenth to 0.3 percent in January -- which brings the year-on-year rate for this reading to 2.5 percent and its highest level in a year.
CPI Consensus Forecast for February 08: +0.3 percent
Range: +0.1 to +0.3 percent
CPI ex food & energy Consensus Forecast for February 08: +0.2 percent
Range: +0.2 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. |
![[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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