|CPI - M/M change||-0.2%||-0.4% to 0.2%||-0.2%||-0.1%|
|CPI less food & energy- M/M change||0.1%||0.1% to 0.2%||0.2%||0.1%|
|CPI - Y/Y change||0.0%||0.2%|
|CPI less food & energy - Y/Y change||1.9%||1.8%|
There may be a little bit of inflation centered in housing, otherwise the September consumer price report doesn't point to any urgency for a rate liftoff. Overall the CPI fell 0.2 percent as expected with the year-on-year coming in unchanged. But when stripping out food, which moved higher in September, and energy, which moved sharply lower, the core CPI rose 0.2 percent which is the high-end expectation. Year-on-year, the core, unlike the total CPI, is moving higher, but not by much, up 1 tenth at 1.9 percent.
The pressure in the report is housing where owners' equivalent rent is moving higher, but again only by 1 tenth to plus 0.3 percent. The year-on-year rise in housing is still tame at plus 2.1 percent, but the BLS is warning that shelter costs are showing "acceleration" and "momentum".
Energy fell 4.7 percent in September for a year-on-year decline of 18.4 percent. Gasoline is the main factor here, down 9.0 percent in the month for a 29.6 percent year-on-year decline. The decline in energy is pulling down transportation costs, 2.3 percent lower for a year-on-year rate of minus 8.7 percent. But food was higher in the month, up 0.4 percent for a year-on-year rate, however, of only plus 1.6 percent.
Other readings include a 0.3 percent decline in apparel where the effects of low import prices are showing. Medical care rose 0.2 percent with a year-on-year rate of plus 2.5 percent which, though tame, is the highest year-on-year rate of any component. Education & communication rose 0.3 percent with its year-on-year rate at only plus 0.4 percent.
The increase in housing costs is a plus for the hawks but only a limited one. Price gains are generally very limited underscored by the zero year-on-year rate for overall prices which is a result that points to no COLA benefits for 2016. This report is unlikely to shake up expectations which are calling for no rate hike in October but with a still significant chance for December.
Market Consensus Before Announcement
Pulled down by energy prices, the consumer price index is forecast to contract 0.2 percent in September following August's 0.1 percent decline. The core, which excludes both food & energy, is expected to rise but only fractionally, by plus 0.1 percent. Consensus outcomes would not raise talk of a Fed rate hike.
The Consumer Price Index is a measure of the change in the average price level of a fixed basket of goods and services purchased by consumers. That is the index shows the change in price levels since the index base period, currently 1982-84 = 100. Monthly changes in the CPI represent the rate of inflation.
The consumer price index is available nationally by expenditure category and by commodity and service group for all urban consumers (CPI-U) and wage earners (CPI-W). All urban consumers are a more inclusive group, representing about 87 percent of the population. The CPI-U is the more widely quoted of the two, although cost-of-living contracts for unions and Social Security benefits are usually tied to the CPI-W, because it has a longer history. Monthly variations between the two are slight.
The CPI is also available by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for many metropolitan areas. The regional and city CPIs are often used in local contracts.
The Bureau of Labor Statistics also produces a chain-weighted index called the Chained CPI. This measures a variable basket of goods and services whereas the regular CPI-U and CPI-W measure a fixed basket of goods and services. The Chained CPI is similar to the personal consumption expenditure price index that is closely monitored by the Federal Reserve Board.
The consumer price index is the most widely followed monthly indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact.
Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets- and your investments.
If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation as you know the $100 will not be able to buy the same amount of goods and services a year from now. The CPI tells us that prices rose 4.2 percent in the U.S. over 2007. To recoup your purchasing power, you would have to charge 4.2 percent interest. You might want to add one or two percentage points to cover default and other risks, but inflation remains the key factor behind the interest rate you charge.
Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.
The consumer price index is the most widely followed monthly indicator of inflation. The CPI is considered a cost-of-living measure since it is used to adjust contracts of all types that are tied to inflation. Labor contracts are tied to changes in the CPI; Social Security payments are tied to the CPI; and even tax brackets are tied to the consumer price index.
For monetary policy, the Federal Reserve generally follows "headline" and "core" inflation. This latter measure excludes the volatile food and energy components. The Fed's preferred inflation measure is not the CPI but the personal consumption price index because it reflects what consumers are actually buying during any given period-the component weights are updated annually while those for the CPI are updated infrequently. However, the subcomponent price data of the CPI are used to compile the PCE price index (PCE prices are released almost two weeks after the CPI). Thus, the CPI and the PCE price index are inextricably linked. In the long run, the overall CPI and core CPI track each other.
The bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.
Economic data tend to be volatile from month to month; the CPI is no exception. Large fluctuations in the consumer price index are often due to the food and energy components. Weather conditions affect both to a large extent. OPEC, the oil cartel, also affects energy prices. As a result, economists and financial market participants prefer to monitor the CPI excluding food and energy prices for its greater monthly stability. This is also referred to as the "core" CPI. Oddly enough, items that make part of the "core" also include discretionary goods and services. And while food and energy prices are excluded because of their monthly volatility, what can be more "core" than food and energy? Food and energy prices account for a little more than one-fifth of the CPI.
The consumer price index has evolved over time as consumer expenditures changed. Commodities now make up only 40 percent of the index and the remaining 60 percent are services. It is useful to monitor goods and services separately since prices of goods are more volatile than prices of services.
Usually, when investors refer to the real rate of interest, they use the year-over-year rise in the CPI to subtract from an interest rate, such as the 10-year Treasury note.