Tuesday, April 17, 2007

CPI Up .6%

From Bloomberg:

A measure of prices paid by U.S. consumers rose less than forecast last month, supporting the Federal Reserve's call that inflation will subside as the economy slows.

The 0.1 percent increase in core consumer prices, which exclude food and energy costs, was the smallest this year and follows a 0.2 percent February gain, the Labor Department said today in Washington. Prices overall rose 0.6 percent in March, led by a jump in fuel costs.

Less inflation may give Fed Chairman Ben S. Bernanke and his colleagues more latitude to lower interest rates to reinvigorate the economy in coming months, economists said. Cheaper clothing and hotel stays and a smaller gain in medical care costs restrained price gains last month, suggesting a slowing economy is starting to help alleviate price pressures.

Here's how Reuter's reported the number:

A surge in gasoline costs helped drive overall U.S. consumer prices up at the sharpest

rate in nearly a year during March, though so-called core prices that exclude food and energy items rose at a muted pace, the Labor Department said on Tuesday.

The Consumer Price Index climbed at a 0.6 percent rate, up from 0.4 percent in February. It was the largest monthly increase since a matching 0.6 percent rise last April.

A 10.6 percent jump in gasoline prices last month eclipsed a 0.3 percent gain in February and was the largest increase in 1-1/2 years since a 17.4 percent gain in September 2005.

Here is the news release from the BLS:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in March, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The March level of 205.352 (1982-84=100) was 2.8 percent higher than in March 2006.


For the first three months of 2007, consumer prices increased at a seasonally adjusted annual rate (SAAR) of 4.7 percent. This compares with an increase of 2.5 percent for all of 2006.

Let's cut through all of this static.

1.) Everybody talks about the core rate, but almost no one explains why the Federal Reserve looks at the core rate. The Fed looks at the core rate to see if the more volatile price components of CPI (food and energy prices) are bleeding through to other areas prices. If core CPI is tame, it usually means the more volatile prices are not impacting other prices. This is what has given the Federal reserve the confidence to continually state price pressures should subside over time.

2.) All that being said, outside of this policy perspective, the core rate is practically useless. Everybody consumes gas and food so the overall rate is what is important from an individual's perspective. And this number is not good. It indicates prices are increasing at an uncomfortable rate.

3.) Notice the year-over-year number increased 2.8%. That is .8% above the Fed's preferred level of 1%-2%. Translation: the Fed isn't lowering rates anytime soon (barring clear signs the economy is tanking hard).

4.) There are some very scary 3-month compound growth rate numbers in this report. Food: +7.4%, Transportation, +8.3%, Energy +22.9%, Medical Care +5.6%.

Short version: this report further solidifies my conviction that the Fed is on the sidelines for the foreseeable future, barring evidence the economy is tanking hard.