Good CPI a Bit Fluky

The modest 0.1% gain in the core consumer price index (CPI) in the month of March may calm fears about the inflation situation for a short while, but concerns are likely to linger a bit longer particularly because many of the forces that suppressed the March figure seem unlikely to repeat. In particular, tame apparel, lodging, and medical costs.

Apparel costs fell 1.0%, matching a decline last seen in April 2001, which was the biggest decline since September 1998 and a drop exceeded only twice in 18 years.

Lodging costs fell 2.3%, the most since September 2005. The drop is well below trend, which saw lodging costs increase 4.0% in the prior 12 months.

Medical costs increased only 0.1%, well below typical gains of 0.3% and 0.4%, and matching the smallest increase seen over the past 30 years, a gain seen only seven times during the span. Powerful demographics make it unlikely that medical costs will stay as tame in future months.

The Federal Reserve is unlikely to be calmed by today's data for a few reasons. For starters, the factors that kept prices down in March are unlikely to repeat. Second, the trend for core CPI for the first quarter was higher than desirable, running at a compounded annual pace of about 2.5%.

Third, the Fed puts more weight on the deflator for personal consumption expenditures, which will be released on April 30 for the month of March and April 27 for all of the first quarter.

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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.

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