Interest Rate Roundup

Friday, March 16, 2007

CPI shows ongoing inflation pressures

The Consumer Price Index was just released. Once again, there was little evidence that inflation is abating. Some details:

* The headline CPI gained 0.4% in February, above expectations for a 0.3% change and twice the gain (0.2%) in January. That pushed the year-over-year inflation rate UP to 2.4% from 2.1%.

* The core (ex-food and energy) CPI was up 0.2%, in line with the 0.2% gain forecast and slightly below the 0.3% gain a month earlier. Importantly, the year-over-year rate of core inflation came in at 2.7% again -- well above the Fed's 1% to 2% preferred range.

* Price gains were fairly widespread. Housing costs rose 0.4%. Services inflation rose 0.4%. Energy prices climbed 0.9%. Apparel was up 0.5%. Medical care climbed 0.5% and education and communication rose 0.3%.

The Fed keeps saying inflation will ease. The numbers don't show it. Can the Fed really afford to breathe a sigh of relief in the face of data like this? I doubt it. Treasuries are getting hit on this news, with the Long Bond down 13/32 in recent trading and 10-year yields up about 1.7 basis points.

The dollar came into this data trading very weak against all currencies. It's bouncing a bit on the news. But if it can't hold that bid, key currencies like the euro could stage significant technical breakouts. Interesting times, to say the least.


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