US: Consumer Price Index


Tue Jun 12 07:30:00 CDT 2018

Consensus Consensus Range Actual Previous
CPI - M/M change 0.2% 0.1% to 0.5% 0.2% 0.2%
CPI - Y/Y change 2.8% 2.3% to 2.8% 2.8% 2.5%
CPI less food & energy- M/M change 0.2% 0.2% to 0.3% 0.2% 0.1%
CPI less food & energy - Y/Y change 2.2% 1.9% to 2.3% 2.2% 2.1%

Highlights
Consumer prices are moving incrementally higher in results for May that hit Econoday's consensus across all four readings: up a monthly 0.2 percent both overall and for the core with year-on-year rates up 3 tenths overall to 2.8 percent and the core up 1 tenth to 2.2 percent.

Gasoline jumped 1.7 percent in the month outside of which most other readings are modest-to-moderate. Rent rose 0.3 percent in the month as did owners' equivalent rent while medical care, outside of a spike for related commodities and hospital services, remains largely flat. New vehicle prices, up 0.3 percent, are showing some pressure with car insurance showing continuing pressure at a 0.4 percent gain. But there are plenty of soft spots including a 1.9 percent decline for airfares, no change for apparel, and a 0.9 percent drop in used car prices.

Though the 2.2 percent yearly rate for the core is moderate, it is the highest rate since February last year. What counts most here is the upward trajectory which points to a continued climb to 2 percent for core PCE prices which, at 1.8 percent in both April and March, are on a convincing approach to the Federal Reserve's 2 percent goal. Today's data, though moderate, will confirm expectations for a rate hike at this week's FOMC.

Market Consensus Before Announcement
Forecasters are calling for no more than modest pressure in the consumer price report for May, at monthly gains of 0.2 percent overall and with the core rate also seen up only 0.2 percent. Year-on-year rates are expected to be mixed with the overall up 3 tenths to 2.8 percent but the core up only 1 tenth at 2.2 percent.

Definition
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. Monthly changes in the CPI represent the rate of inflation for the consumer. Annual inflation is also closely watched.

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.





Description
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.

Importance
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.

Interpretation
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.