Finance Gourmet Blog

In news that will not be met with happiness on Wall Street, the inflation data for January was not good. A 0.3 jump in the core CPI index spells the end of rate cuts from the Fed.

Wondering what the big deal is? The CPI or Consumer Price Index is a widely watched measure of inflation. Basically, the CPI is a statistic calculated by watching the prices of a certain basket of goods. The 0.4 jump in the CPI says that statistically, prices have increased by 0.4% in January. Many people discount the main CPI number because it includes items which tend to swing widely in price. You’ll see this referred to as “volatile” in the media. The Core number is the same index minus food and energy which are the “volatile sectors.” Energy is the one that people really like to ignore because the price of the biggest energy commodity, oil, has nothing to do with inflationary pressures here in the United States, and everything to do with the geopolitical economy and in particular whatever the guys over at OPEC say it has to do with. Thus, it doesn’t make too much sense to tie U.S. policy to the rise or decline in the price of oil, so we take it out of the equation by reporting the “Core CPI.”

What does this mean for the average Joe? Well, even if the Fed does manage to squeeze in another rate cut in the near future, readings like this signal the end of rate cuts moving forward. Although your credit card and home equity line rates are short-term rates (tied closely to Fed action), your first mortgage is tied to long-term interest rates which are determined by the markets and not the Fed. So, even if the Fed cuts rates again, you won’t see much movement in mortgage rates because the markets will be pricing in the fact that in the long term rates are more likely to rise than to fall. In other words, if you are looking to finance or refinance, do it. You aren’t going to gain much by waiting. On the other hand, there is no need to panic yet. One reading isn’t definitive and it might still be revised later. So, if the February number looks better this could all be moot, but I don’t bet the farm.

Why are we getting the January number now (Feb 20)? Because the January number includes data through Jan. 31, calculations can’t begin until Feb. 1. The math isn’t simple, and the data has to be collected and forwarded, hence the delay. The funny part is, this number is still just the initial number. As more data comes in and verification continues, these numbers are often “revised.” Usually this data is released when the next month’s data comes out. So, in March we’ll get the Feb. numbers and they might change the January number. If the Feb. number is low and the Jan. number gets moved down, welcome back to the party. If not, the last one out should get the lights.

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