US: Consumer Price Index

Fri Oct 13 07:30:00 CDT 2017

Consensus Consensus Range Actual Previous
CPI - M/M change 0.6% 0.3% to 0.7% 0.5% 0.4%
CPI - Y/Y change 2.3% 2.0% to 2.4% 2.2% 1.9%
CPI less food & energy- M/M change 0.2% 0.1% to 0.3% 0.1% 0.2%
CPI less food & energy - Y/Y change 1.8% 1.7% to 1.8% 1.7% 1.7%

Moderation in both housing and medical costs is the dovish story behind September's consumer price report, factors that held down the core rate to a lower-than-expected 0.1 percent gain. The core excludes food and also energy which spiked a hurricane-driven 6.1 percent to lift the overall rate to an outsized looking 0.5 percent.

But it's the fundamental costs that look soft in September's report. Housing rose only 0.2 percent in the month, which is half of August's gain, with the closely watched owners' equivalent rent component slowing 1 tenth to 0.2 percent. Medical care actually went into reverse at minus 0.1 percent. Prescription drugs were very soft here, down 0.6 percent with nonprescription drugs down 1.4 percent. Apparel is also in the negative column at minus 0.1 percent to end a positive run of gains while both new and used vehicles fell, down 0.4 and 0.2 percent respectively.

Positive traction includes wireless services which have been moving in reverse most of the year though posting a 0.4 percent September rise. Recreation posted a 2nd straight 0.2 percent gain while food was a non-factor once again, up 0.1 percent.

Year-on-year rates won't be alarming the hawks at the FOMC, up 3 tenths to 2.2 percent overall but holding, for a 5th month in a row, at a subpar 1.7 percent for the core. This report, which did show pressure in August, is not showing the same pressure in September and offsets, at least to a degree, the significant signs of wage pressures in September's employment report. Today's report will soften the inflation debate at the month-end FOMC. The Department of Labor is downplaying any hurricane impacts on the report though it does note that data collection in Florida was impacted slightly.

Market Consensus Before Announcement
The 0.2 percent gain for core consumer prices was perhaps the most important economic data coming out of the month of August. Though it didn't translate into strength for the Federal Reserve's preferred inflation reading, core PCE prices, it did foreshadow an outsized September gain and upward revisions for wages (average hourly earnings). Forecasters don't see a major gain for September's core CPI, at a consensus 0.2 percent repeat, but they do see energy-related strength for the overall CPI where the consensus is 0.6 percent in what would follow a 0.4 percent gain in August that also was boosted by higher fuel costs. Year-on-year rates are expected to rise, to 2.3 percent overall in what would be a 4 tenths increase and 1.8 percent for the core in what would be a 1 tenth improvement.

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.