|CPI - M/M change||0.2%||-0.1% to 0.2%||0.2%||-0.2%|
|CPI less food & energy- M/M change||0.2%||0.1% to 0.3%||0.2%||0.2%|
|CPI - Y/Y change||0.2%||0.0%|
|CPI less food & energy - Y/Y change||1.9%||1.9%|
Consumer prices are showing some lift but not wide pressure nor accelerating pressure, at least yet. The CPI rose 0.2 percent in October with the core also up 0.2 percent, both hitting expectations. Year-on-year, the CPI is up only 0.2 percent which however is up from zero in September while the core rate is unchanged at plus 1.9 percent which is right at the Fed's general 2 percent goal. And the year-to-date core is running slightly higher, at plus 2.1 percent which is up 3 tenths from this time last year.
Medical care ended a run of quiet months with a 0.7 percent jump in the month, taking the year-on-year rate to plus 3.0 percent. Education & communication rose 0.3 percent for a second month though this year-on-year rate is only at plus 1.0 percent. Vacation prices are going up with airfares up a very sharp 1.5 percent and shelter away from home up 0.8 percent. But housing costs all together rose only 0.2 percent, down 1 tenth from September's 0.3 percent gain with the year-on-year rate a manageable plus 2.1 percent.
Energy prices rose 0.3 percent in the month following steep plunges in the prior two months. Year-on-year, energy is down 17 percent with gasoline alone down 28 percent. Food prices are soft, up only 0.1 percent in October with the year-on-year rate at only plus 1.6 percent. Apparel, down 0.8 percent for a year-on-year minus 1.9 percent, is a direct reflection of low import prices.
What pressure there is in this report is balanced against still declining import prices and weak commodity prices and weak wholesale prices. Of all the inflation reports, this, the most important, is showing the most pressure, but not enough to be decisive for the December FOMC.
Market Consensus Before Announcement
Consumer prices at the headline level have not been showing any pressure at all, having fallen for two straight months in declines tied to low energy costs and low costs for imports, the latter reflecting the strength of the dollar. But the Econoday consensus is calling for a 0.2 percent rebound in October. Shelter prices have been showing some pressure and have been pushing up the core rate which is expected to also increase 0.2 percent in what would be a tangible gain for this closely watched reading.
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.