The year-over-year change in the consumer price index increased to 2.7% in
January from 2.6% in December, holding well above levels that would satisfy
the Federal Reserve, which would prefer an inflation rate of no higher than
2.0%.
Simply put, last year's acceleration in the inflation rate has been
sticky, with inflation showing only modest improvement outside of energy
prices, despite moderation in the U.S. economy in the final three quarters of
2006. Should this stickiness continue and economic growth accelerates, the notion of a Fed rate hike would hardly seem far-fetched.
This would take time, however, and there remain enough problems in the
housing market to keep the Federal Reserve at bay, although a steady mix of
strong economic news and sticky inflation would raise the odds of a hike
considerably.
The causes of the 0.3% jump in the core consumer price index, or CPI, were
many. One of the biggest contributors was a familiar one: medical care
costs. They rose 0.8%, adding a tenth of a percentage point to the core.
The increase was the result of a 1.1% increase in prescription drug costs
and a 1.2% increase in doctor's fees.
Most in America are familiar with
these persistent gains, which are likely to remain sticky because of
powerful demographics and because of policy initiatives to broaden the
availability of health care.
Rents
Continuing to march higher is the cost of residential rents, which increased
0.4% for an eighth consecutive month, with the gain now at 4.5% vs. a
year ago. Rents continue to be buoyed by weak home-buying activity. This
should continue for a while.
Food Prices
Food prices are beginning to supplant energy prices as an influence on the
consumers' inflation expectations. In January, food and beverage prices
increased a sharp 0.7%, matching the largest gain seen since December 1994
when prices rose 0.8%. The increase was widespread.
Food and beverage
prices account for 15.0% of the consumer price index, much more than the
8.7% weighting for energy prices. Although consumers are not as familiar
with individual price points for the multitude of food products as they are
with the cost of gasoline, consumers are likely noticing the gains and this
will boost inflation expectations.
FOMC Minutes
New pressures have been added to this afternoon's release of the minutes to
the Federal Reserve's Jan. 31 FOMC meeting. Any negative comments by
the Fed about the current inflation situation will now be magnified.
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Tony Crescenzi Blog Sizing Up the Yen Carry Trade 2/20/2007 4:39 PM EST The fallout from an unwinding of the yen carry trade would not be as large as it was in 1998.
Tony Crescenzi Blog Bank Credit Hits Record 2/20/2007 1:09 PM EST The effect of the subprime debacle on other segments has been minimal.
Tony Crescenzi Blog Steel Output Falls 2/20/2007 11:39 AM EST It's the first drop in production in seven weeks.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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