Interest Rate Roundup

Friday, September 15, 2006

right numbers, wrong reaction? Or not?

Let's look at the meat of this Consumer Price Index report. It showed ...

* Core inflation, excluding food and energy, up 0.24% (just shy of being rounded up to 0.3%, incidentally) on the month. That helped push the year-over-year core inflation rate to 2.8%. Not only is that well above the Fed's unofficial 2% target, it's the single biggest increase going all the way back to March 1996.

* Several categories of goods and services showed increases. Food. Apparel. Medical care. Education and communication. They were all up. So it wasn't just oil and gas, and it wasn't just owners' equivalent rent, which some have claimed distorts the true inflation picture.

* Now, the big decline we've seen in oil and gas prices will obviously lower headline inflation in the next month. But on the way up (i.e. when inflation was rising), all I heard was how commodity price increases don't matter, how our economy was much less sensitive to oil, and that the REAL source of inflation was other things, like wage growth. Ergo, ignore the increase in inflation.

Now, we have rising wages and falling oil prices, and we're supposed to believe the opposite ... that inflation will die out because oil is down to $62.50 a barrel? I don't know. Maybe we can have it both ways. But I'm skeptical.

In the end, though, it doesn't matter what I think -- it only matters what the market thinks. And so far, Treasuries are having a modest rally on the news (11/32) recently on the long bond. Stocks are also throwing a party.


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