Consumer inflation hot, but in-line

The other big piece of economic data this morning was the March Consumer Price Index. The details:

* The headline CPI rose 0.3% in March, up from 0% in February. That was in line with expectations. The overall CPI is now rising at 4% year-over-year rate, the same as in February. The high-water mark in recent history remains 4.7% in September 2005, a reading that followed the landfall of Hurricane Katrina that year.

* Core CPI, which excludes food and energy, rose 0.2%. That was up from no change a month earlier, but also in line with forecasts. Core CPI is rising at a 2.4% rate, up from 2.3% in February. The high-water mark for core CPI is 2.9%, set back in September 2006.

* Within product categories, energy prices rose 1.9% on the month, education and communication prices gained 0.3% and recreation costs rose 0.3%. Apparel prices, on the other hand, dropped a rather sharp 1.3%, while medical care cost growth was tame for a second month at 0.1%.

Looking at the bonds, I think we're on the verge of a potentially serious price breakdown. This long bond futures chart shows an uptrend line that goes all the way back to last June, when the credit crisis began to unfold.

If we were to break below it ... and especially if that break were accompanied by a large upside move in stocks and a collapse in volatility gauges, like the VIX ... it could be a sign that the tentative, short-term improvement in credit market conditions is starting to stick. Why? In my view, the only reason bonds are holding up this well in the face of dismal inflation news is because Treasuries have been receiving billions of dollars in "flight to safety" money. A technical breakdown would signal to me that those money flows are reversing.