I would be remiss if I failed to address yesterday’s CPI data, which can be described as tepid. And as you may have surmised, this does not change my views about inflation. One data point does not make a trend.
As the chart at left shows, the slight downtick in inflation is hardly trendbusting.
Indeed, the prime source of moderation in February was declining energy prices. Funny, the inflation ex-energy crowd — after 52 months of rising oil prices — decided that NOW was the time to report CPI with energy. Cute.
Even more significantly, the offsetting items that dropped in price are the typically volatile issues that may (or may not) rise next month. Indeed, from the lows in February of ~$59.25, Oil has rallied to $65.
Of course, when the March CPI comes out next month, we will hear that "its only a short term energy spike." I predict in the March CPI, the emphasis will return to CPI ex-energy. That’s consistent with the 4 year history of CPI inflation ex-inflation.
On to the details. The BLS reported Energy prices fell 1.2% — after a 5% rise in January (Gee, why don’t we report those 2 data points together like they did in response to tepid Retail Sales?). The WSJ notes "energy prices "were still
20% higher than a year ago. Gasoline prices fell by 1%, and natural-gas
costs dropped 4.5%, the sharpest slide since September 2001."
I am nothing if not consistent: I think you have to consider the decrease in energy this month (as opposed to those who have ignored it for 4 years). But we have already seen much of those price drops reversed in March. I am already gearing up to respond to CPI next month when the Booyah crowd selectively claims: "its only a volatile energy number."
Note that in annual terms, overall CPI rose 3.6% — and thats with all of the absurdities that number embodies.
This has led — for the 3rd time in 8 months, mind you — for the Fed to be Two and Through or even One and Done. Marketwatch’s Rex Nutting observed:
"Futures markets now expect the federal funds rate to peak at 5% in May, rather than at 5.25% in June as expected just four days ago. There’s even a small chance — about 1-in-6 — that the Fed will call it quits after one more rate hike, leaving the fed funds rate at 4.75%. See interactive graphic tracking federal funds rate.
The rally in the federal funds futures market at the Chicago Board of Trade mirrors a big rally in the bond market Thursday. The yield on the 10-year benchmark note fell to 4.65% from 4.73% Wednesday. The 10-year was trading significantly below the 4.75% rate expected for the federal funds rate just two weeks hence."
Rex also points out:
The core inflation rate remained at 2.1% year-over-year as the consumer price index rose a moderate 0.1% in February.
Import prices excluding fuels have risen just 0.8% in the past year.
Real weekly wages are down 0.1% in the past year.
Housing starts fell 8% in February. Mortgage applications are down 20% year-over-year.
Weekly jobless claims rose to the highest level of the year.
Retail sales fell 1.3% in February.
Manufacturing activity in the Philadelphia region showed a slower pace of growth in March, and a steady reduction in inflation pressures.
If the March CPI data (to be released April 20) is even modestly robust, we can all enjoy a chuckle when the One and Done crowd’s heads explode . . .
Energy Prices Cool Off, Helping Restrain CPI
WALL STREET JOURNAL, March 16, 2006 5:31 p.m.
Fed likely to stop at 5%, market says
MarketWatch, 3:01 PM ET Mar 16, 2006
Consumer prices tame in February
Core CPI rate rises 0.1%, keeping yearly gain to 2.1%
MarketWatch, 10:02 AM ET Mar 16, 2006