CPI and what it means

I last wrote about CPI 2 months ago (back in December).
It had to do with the November CPI and Core CPI data

Sometimes I like to go back and read what happened and why.
It gives you a perspective on how topsy turvy the markets can be sometimes.

Here's the post from December: LINK



Here's a rehash of the why and what of CPI:

It's put together by the Dept. of Labor and is a weighted average of prices of a specified set of goods and services purchased by consumers.

In simple terms, it tracks the prices of a "specified basket of consumer goods and services, providing a measure of inflation". It's considered a cost-of-living index.

When that shopping cart of goodies rises dramatically we have inflation.

You'll hear from time to time people referring to "Core Inflation".
Core Inflation is when you take the CPI numbers and back out the most volatile components - food and energy.

Why you ask?

Because these two groups can have dramatic mood swings, which then will skew the monthly numbers, which then might have even more dramatic results on the market.

Why do we care?
> CPI is very closely watched by the Feds.
> The Feds raise and lower short term interest rates.
> That changes influences the markets in general (not 30 yr mortgages)
> Which then determines how much investment money is out there for lenders to use and at what rates.

So other there are other reasons why we as members of society care about CPI than just how much it's going to cost us to live here, cloth our children in the latest fashions, and so on.

So back in December, when the CPI came out I reported the actual odds of the Fed's having a RATE CUT in the near future doubled!
That wasn't my odds, those were the odds given from large institutional types.

"Mike, you said a Rate Cut? All I hear about in the news is about the Fed's having to Raise rates - not lower them. What gives?"

Easy. Back in December, the November CPI was referred to as very tame.
In fact it was unchanged in both raw data and core data.

Since then we've had a number of other factors come into play.

First of which, the latest core inflation number bumped up .2%!
That's the largest jump since last June.
(the experts were expecting a number closer to .1%)

Then just last week, in talking to the nation's lawmakers, Mr. Bernanke said that "The Fed expects core inflation to drift lower, but cautioned that the Fed is poised to raise rates if necessary to contain inflation."

So...

• The core inflation figure they were expecting went up not down.
• Not only did it not go down, it doubled what they were expecting.
• And the "Head Fed" publicly and specifically announced their intentions concerning this indicator.

That's a clear cut signal to the big money playing with the odds that what might have been back in December, isn't anymore now in February.

In the end, the market is always right.
We can just sit back, try to make sense of it all, and enjoy the ride.