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ECONOMIC OUTLOOK
Core CPI expected to rise 0.2%
By Rex Nutting, MarketWatch
Last Update: 5:47 PM ET Feb 21, 2006
WASHINGTON (MarketWatch) -- The Federal Reserve and financial markets are on inflation watch, 24/7.
The Fed has said that it is "close" to the end game, but warned that the incoming data would matter when it decides at each meeting whether to raise interest rates or stand pat.
Some members of the committee are concerned that inflation is accelerating, but others say core inflation and inflation expectations are still contained.
If the Fed's next move is dependent on the data, each release of the consumer price index becomes a key moment for the markets.
The Labor Department will release the CPI for January on Wednesday at 8:30 a.m. Economists surveyed by MarketWatch look for a 0.5% gain in the CPI, the first increase since October and the highest since the 1.2% gain in September, which was the highest in more than 25 years. See Economic Calendar.
After two months of declines, energy prices rose in January. For example, retail gasoline was averaging about $2.20 a gallon in early December, but rose to $2.40 by the end of January.
If the CPI did rise 0.5%, the index would have risen 3.8% in the past 12 months, higher than the Fed would like, but down from the peak of 4.7% in September.
Core prices, meanwhile, are expected to rise 0.2% in January, maintaining the 2.2% year-over-year growth seen in December and over the past 10 years. Read more about core inflation in the weekly Economic Preview.
A core CPI growing at 2.2% would be sufficiently worrisome to keep the Fed on its path toward higher rates in March and perhaps May, economists say.
"This masks what we think is a modest uptrend in the core CPI," said Peter Hooper, chief U.S. economist for Deutsche Bank. The core CPI has risen at a 2.6% annual rate in the past three months.
Core prices are what matter for the Fed. Not because energy doesn't count, but because the Fed is concerned about inflation, not just higher prices.
If energy costs more because of shifting supply and demand, there's little the Fed could or would do. That's higher prices, not inflation. But if higher energy cost bleed into the prices of all other goods, that could help fuel a general inflation. That's what the Fed is focused on.
As the FOMC said on Jan. 31:
"Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures."
Core prices are likely to be pushed higher in January by vehicle prices, postage and medical costs, said David Greenlaw, an economist for Morgan Stanley.
Housing prices are likely to put upward pressure on the core rate as well, said Hooper.
Copyright © 2006 MarketWatch, Inc. All rights reserved.
ECONOMIC OUTLOOK
Core CPI expected to rise 0.2%
By Rex Nutting, MarketWatch
Last Update: 5:47 PM ET Feb 21, 2006
WASHINGTON (MarketWatch) -- The Federal Reserve and financial markets are on inflation watch, 24/7.
The Fed has said that it is "close" to the end game, but warned that the incoming data would matter when it decides at each meeting whether to raise interest rates or stand pat.
Some members of the committee are concerned that inflation is accelerating, but others say core inflation and inflation expectations are still contained.
If the Fed's next move is dependent on the data, each release of the consumer price index becomes a key moment for the markets.
The Labor Department will release the CPI for January on Wednesday at 8:30 a.m. Economists surveyed by MarketWatch look for a 0.5% gain in the CPI, the first increase since October and the highest since the 1.2% gain in September, which was the highest in more than 25 years. See Economic Calendar.
After two months of declines, energy prices rose in January. For example, retail gasoline was averaging about $2.20 a gallon in early December, but rose to $2.40 by the end of January.
If the CPI did rise 0.5%, the index would have risen 3.8% in the past 12 months, higher than the Fed would like, but down from the peak of 4.7% in September.
Core prices, meanwhile, are expected to rise 0.2% in January, maintaining the 2.2% year-over-year growth seen in December and over the past 10 years. Read more about core inflation in the weekly Economic Preview.
A core CPI growing at 2.2% would be sufficiently worrisome to keep the Fed on its path toward higher rates in March and perhaps May, economists say.
"This masks what we think is a modest uptrend in the core CPI," said Peter Hooper, chief U.S. economist for Deutsche Bank. The core CPI has risen at a 2.6% annual rate in the past three months.
Core prices are what matter for the Fed. Not because energy doesn't count, but because the Fed is concerned about inflation, not just higher prices.
If energy costs more because of shifting supply and demand, there's little the Fed could or would do. That's higher prices, not inflation. But if higher energy cost bleed into the prices of all other goods, that could help fuel a general inflation. That's what the Fed is focused on.
As the FOMC said on Jan. 31:
"Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures."
Core prices are likely to be pushed higher in January by vehicle prices, postage and medical costs, said David Greenlaw, an economist for Morgan Stanley.
Housing prices are likely to put upward pressure on the core rate as well, said Hooper.
Copyright © 2006 MarketWatch, Inc. All rights reserved.
posted by Jones Lang LaSalle NJ News Blog at 4:44 PM
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