Inflation Still Sticky

The consumer price index (CPI) increased 0.2% when food and energy are excluded, exactly as expected. Nevertheless, today's report provides little reason for comfort. Prices increased broadly and the signs of letup are scant.

Moreover, before rounding the core CPI actually increased 0.241%, meaning that it trended at an annualized pace of about 2.9%, much more than the Federal Reserve's target for an inflation rate of no more than 2.0%.

Mind you, a case could still be made for the Fed to cut rates even as inflation rises given its laggard tendency. Such was the case in 2001 when the Fed cut rates 10 months before inflation peaked. What's missing in this case, however, is clear evidence that inflation is set to head on a downward path. Weaker economic data would suffice as would evidence of spillover from recent problems in the sub-prime mortgage market.

I mentioned earlier that the increases seen in today's inflation report were widespread. Categories seeing gains included housing (+0.4%), apparel (+0.5%), medical care (+0.5%), airfares (+0.9%), and food and beverages (+0.8%). Perhaps the most notable of these increases is the increase in food and beverage prices, which account for 15% of the CPI.

Increases in ethanol production, strong global economic growth, and weather-related influences are driving food prices higher. Although consumers do not have a grip on food prices as they do gasoline prices, consumers are likely to notice the increases, which are showing up in a wide spectrum of items.

ALL TONY CRESCENZI BLOG ENTRIES | POST A COMMENT | READ COMMENTS  

---

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 revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and 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.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.