US: Consumer Price Index

Thu Sep 14 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous
CPI - M/M change 0.3% 0.3% to 0.4% 0.4% 0.1%
CPI - Y/Y change 1.9% 1.8% to 2.1% 1.9% 1.7%
CPI less food & energy- M/M change 0.2% 0.1% to 0.2% 0.2% 0.1%
CPI less food & energy - Y/Y change 1.6% 1.6% to 1.8% 1.7% 1.7%

For the first time since February, core consumer prices did not come in below expectations, hitting the consensus with a modest but useful 0.2 percent gain. Overall prices rose 1 tenth more than expectations at an energy-inflated 0.4 percent.

Looking first at core readings, housing, which is the report's dominant component, has been moderating but picked back up in August to a 0.4 percent gain. Within housing, lodging away from home reversed July's unusual plunge with a 4.4 percent surge while owners' equivalent rent rose 0.3 percent. Wireless telephone services have been very weak this year but contraction eased in August, to only a 0.1 percent decline. Prices for new vehicles were flat, used vehicles dipped 0.2 percent, while transportation services, reflecting a 1.0 percent jump in insurance, rose 0.4 percent. When including motor fuel, transportation costs rose a very sharp 1.4 percent.

Energy costs, in part reflecting month-end pressure from Hurricane Harvey, jumped 2.8 percent with gasoline up 6.3 percent. Food was not a factor in August showing a 0.1 percent rise.

Year-on-year rates are mixed with overall prices up 2 tenths to 1.9 percent but the core holding flat at a subpar 1.7 percent. Despite lack of progress in the core, August results are not a disappointment and will definitely heat up support for the beginning of balance-sheet unwinding at next week's FOMC.

Market Consensus Before Announcement
Econoday's consensus is calling for a needed uptick in consumer prices, to a monthly consensus gain of 0.3 percent in August vs only a 0.1 percent rise in July. Higher energy prices, which were on the rise even before Hurricane Harvey hit at month end, are expected to provide the lift as the consensus for the core rate, which excludes energy and also food, is for only a 0.2 percent gain vs July's 0.1 percent rise. Year-on-year readings have been very soft, at only 1.7 percent for both July's headline and the core with August's consensus at 1.9 percent overall but only 1.6 percent for the core. Holding down prices has been moderation in housing costs and also declines in vehicle prices and especially communication costs.

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.