Consumer Price Indices (CPI) for several countries were released last week. CPI for the US softened, but with recent volatility in energy prices we can look at Core CPI for an indication of real adjustments in price.
CPI and Core CPI are both very important inflation indicators released monthly. The major difference is that Core CPI excludes volatile energy and food prices. Many people would argue that CPI is more pertinent since we feel the price volatility of energy and food. Core CPI provides a more transparent picture of actual price changes and potential long-term impacts of inflation on our economy.
Strengthening inflation historically reflects a strengthening economy and is not necessarily a bad thing. When inflation increases the Federal Reserve Board (FRB) is likely to increase the fed funds rate creating friction for the consumer and hopefully slowing demand. By doing this the FRB is attempting to keep inflation from running up unchecked.
When we see Core CPI soften, it indicates that the FRB would be less likely to raise rates in the short run. Last week the FRB did not change its language regarding the Fed Funds Rate. Current expectations are for the FRB to raise the rate mid next year. So both the statement from the FRB and the release of softening Core CPI gave the market reason to celebrate as conditions for corporate America should remain favorable for the coming quarter.
CPI 6 pack break down (year over year)[1]:
The information below is one way to view the strength of each of these economies, however they do have to be considered separately. For example, China CPI at 2% has been a continually falling number indicating a weakening economic environment, while 1.7% CPI for the US has been consistent indicating a moderate economy. Another hidden piece of data in these numbers is that Japan’s CGPI is actually padded by a sales tax that caused a recent increase in prices; induced by the country, not demand.
– USA
o CPI: 1.7%
o Core CPI: 1.7%
– Canada
o CPI: 2.1%
o Core CPI: 2.1%
– United Kingdom
o CPI: 1.5%
o Core CPI: 1.9%
– Eurozone
o CPI: 0.4%
o Core CPI: 0.9%
– China
o CPI: 2.0%
– Japan
o CGPI: 3.9%
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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.
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[1] www.investing.com