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 6/13/08 For May 2008 | |||||||||||||||||||||||||
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Highlights
In May, the consumer price index showed plenty of inflation heat while the core index firmed moderately. The May CPI spurted 0.6 percent based on oil-related price increases, following a 0.2 percent increase the month before. The latest number was above the market forecast for a 0.5 percent gain. The core rate also firmed but not as much with a 0.2 percent boost, after a 0.1 percent uptick in April. The consensus had projected a 0.2 percent rise. The jump in consumer price inflation was led by energy with a monthly 4.5 percent surge. The core rate was kept moderate by soft gains in owners' equivalent rent and in medical care. The headline number indeed came in quite strong and is weighing on equity futures and is nudging up interest rates. While the core number was not too worrisome, the headline number is quite scary for the markets and Fed on this Friday the 13th.
Indeed and not surprisingly, energy led the May jump with a 4.5 percent surge after a 0.2 percent down tick in April. The latest increase included a 5.7 percent increase in motor fuel, a 7.9 percent spike in heating oil, and a 2.3 percent gain in piped gas & electricity costs.
The key components keeping the core rate moderate were owners' equivalent rent, up 0.1 percent, recreation, up 0.1 percent, and medical care, up 0.2 percent. Also, new & used motor vehicles slipped 0.1 percent while apparel declined 0.3 percent.
In addition to energy, food prices are still a little toasty, posting a 0.3 percent increase for May. Also on the warm side were education & communication, up 0.4 percent, and "other," gaining 0.4 percent.
Year-on-year, the overall CPI rose to up 4.1 percent in May from up 3.9 percent in April. The core rate was unchanged at up 2.3 percent.
Overall, the May CPI confirms recent Fed statements about the trend in inflation being worrisome. While a soft economy is damping some prices (such as for autos and apparel), higher oil prices are still creating cost pressures in energy and other components. Today's report only reinforces the likelihood that the Fed is starting to think about when to raise interest rates. Neither equities or bonds will like today's report.
The consumer price index surprisingly showed an easing in inflation in April as the overall CPI posted a 0.2 percent increase, after a 0.3 percent boost the month before. The core rate also eased, to a 0.1 percent rise after a 0.2 percent advance the month before. The question for the May release is whether the April improvement was just a fluke or reflected a softening in demand. Indeed, weaker spending may have undercut inflation for motor vehicles, lodging away from home, and household furnishings in the April report. But energy was flat and that likely was just due to mismatches in unadjusted (seasonal) data and assumed seasonal changes in energy components. Also, higher commodity prices and import prices boosted food and apparel. There is lots of uncertainty over the true direction of consumer inflation but the Fed has now made inflation fighting job number one over recession prevention and this report is an almost guaranteed market mover.
CPI Consensus Forecast for May 08: +0.5 percent
Range: +0.2 to +0.7 percent
CPI ex food & energy Consensus Forecast for May 08: +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. |
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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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