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What does this week’s Consumer Price Index tells about the economy?

Chanderlekha Nayar

Must-know releases shaping bonds and stocks this week (Part 7 of 9)

(Continued from Part 6)

What is the Consumer Price Inflation Index?

The Consumer Price Inflation Index (or CPI), issued monthly by the Bureau of Labor Statistics, is a measure of the change in the average price of a fixed basket of goods and services consumers purchase. Commodities make up nearly 40% of the index, while the remaining 60% represents the service sector. 


The consumer price index is the most widely followed monthly indicator of inflation. An investor who understands how inflation influences the markets will benefit over investors who don’t appreciate the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets. For monetary policy, the Fed mostly follows the inflation index along with the US Personal Consumption Expenditure Core Price Index, which say more about consumer buying patterns at any given time.

What did the latest reading say about consumer price inflation?

Consumer price inflation remained modest in February 2014. Headline inflation posted 0.1%, while CPI excluding food and energy inflation rate held steady at 0.1%. Both inflation indicators were in line with January’s pace and met analysts’ expectations. For investors who wish to understand headways in inflation, it’s always advisable to compare CPI index movements for more than a few months. Monthly changes in the CPI are mainly volatile because of sharp fluctuations in food and energy prices. The core CPI eliminates the sharper fluctuations, as it excludes highly volatile items from the basket. The latest readings suggested that the energy component declined 0.5%, while food price inflation jumped to 0.4%. Gasoline prices fell.

How did bond markets react to CPI releases?

The bond market (BND) normally rallies when increases in the CPI are small, and it falls when CPI growth is higher. The equity market (SPY) rallies with the bond market because low inflation promises low interest rates and is good for corporate profitability. Investors can hedge inflation risk by considering ETFs like the ProShares Investment Grade-Interest Rate Hedged ETF (IGHG), which has its major holdings in companies like Citigroup (C) and JPMorgan Chase & Co. (JPM), the Vanguard Short Term Corporate Debt ETF (VCSH), and the PowerShares Senior Loan Fund (BKLN), which are designed to protect investors against interest rate risk caused by inflation. Read on to the next part of this series for housing starts and permit releases.

Continue to Part 8

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