The Consumer Price Index is a measure of 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. Why Investors Care
| Released on 1/18/07 For Dec 2006 | |||||||||||||||||||||||||
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Highlights
December's CPI report showed an oil driven boost in the overall CPI while the core CPI rose back to a pace just above the Fed's comfort zone. Overall consumer prices jumped 0.5 percent in December, following no change in November. December's CPI pace equaled the consensus projection for a 0.5 percent boost. The core CPI came in at a more moderate 0.2 percent gain, following no change in November. December's core rate also matched the consensus projection for a 0.2 percent gain. Year-on-year core inflation growth was unchanged at 2.6 percent. The overall CPI's year-on-year growth rate rose to 2.6 percent in December from 2.0 percent in November.
As expected, energy prices boosted the overall CPI and the core firmed to a moderate pace - but one that is still above the Fed's implicit target zone. In the non-expenditure category for energy, prices jumped 4.6 percent, following a 0.2 percent decline in November. Gasoline prices increased a monthly 8.0 percent following a 1.6 percent drop in November. Energy costs are up 3.1 percent on a year-on-year basis, compared to down 3.6 percent in November.
By expenditure categories, gains were seen in housing, up 0.4 percent; apparel, up 0.6 percent; transportation, up 1.8 percent; medical care, up 0.1 percent; education & communications, up 0.2 percent; and "other," up 0.8 percent. Food & beverages was flat in contrast to the spike in food prices in the PPI. The difference is due to lags in prices from producer to the grocery store. Recreation prices fell 0.3 percent.
Importantly, within housing, the all-important owners' equivalent rent subcomponent maintained a 0.3 percent pace as in November. Rent rose 0.3 percent also, but was down from 0.4 percent in November. Most of the price pressure in housing was in the fuels & utilities subcomponent. What this means is that there was no worsening in the downwardly sticky rent components.
Today's report is going to be a let down for those still hoping for the Fed to cut rates soon. Basically, comments yesterday by San Francisco Fed President Janet Yellen that any easing in consumer price inflation is not yet sustained. Today's report bears that out with the core year-on-year rate still at 2.6 percent. Along with strong housing starts and jobless report today, the CPI will be a negative for both bond markets and equity markets. The news should support the dollar as U.S. rates are not likely to come down soon.
The consumer price index was unchanged in November, following a 0.5 percent decline in October. The core CPI also was flat in November, following a 0.1 percent rise in October. However, the headline CPI is likely to see a reversal in the wrong direction from December's firming in oil prices - which, of course, have reversed again in the New Year. So, the markets will be discounting any firming in the CPI from oil price spillover effects and will give more attention to the core rate. We have seen notable softening over the last few months but the tight rental markets suggest that it may be too good to be true - at least for the housing component. Motor vehicles sales picked up in December and it will be interesting to see how much of the pick up in sales was due to discounting.
CPI Consensus Forecast for December 06: +0.5 percent
Range: +0.3 to +0.6 percent
CPI ex food & energy Consensus Forecast for December 06: +0.2 percent
Range: +0.1 to +0.3 percent
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It is always a good idea to look at more than a few months of data to get a sense of changes in established trends. Monthly changes in the CPI are mainly volatile because of sharp fluctuations in food and energy prices. The core CPI eliminates the sharper fluctuations. |
![[Chart]](chart_1.gif)
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Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation. Even with the smoother trend, note that the core CPI does not fluctuate as much as the total CPI. |
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