March Consumer Price Index 2008

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INDICATOR: March Consumer Price Index

KEY DATA: CPI: +0.3%; Excluding Food and Energy: +0.2%

IN A NUTSHELL: “Inflation is a concern, but only for a limited number of consumer goods.”

WHAT IT MEANS: Consumer prices rose moderately in March despite all the stories of surging costs all over the place. The reality, at least according to the government, is that there are some products where price increases are huge but they are being offset by declines in other goods. As expected, gasoline prices jumped but that was offset by a major decline in clothing costs. Rising utility expenses were balanced by surprisingly tame health care costs and flat to down motor vehicle prices. And the usual surge in education was counteracted by minimal rises in communication and the usual drop in computers. With food showing some unexpectedly modest gains and recreation up moderately, the result was a very acceptable increase in overall consumer prices. Indeed, if you just look at consumer goods (not services) excluding food and energy, prices actually fell in March and over the year they have not budged at all. Non-energy services costs, while elevated, are not greatly out of line as well.

MARKETS AND FED POLICY IMPLICATIONS: Let’s not kid ourselves, inflation is not tame. Over the year, food, energy and health care expenses have skyrocketed. But there have also been areas where prices have not gone up. It’s just that the costs that consumers see on a daily basis are out of control. It is hard to make a case that consumers are doing okay because of a drop in computers and motor vehicles. Not that many people buy those goods every week or even each year. But they do buy clothing and those prices have collapsed. How long that can continue is a real question as the dollar’s decline has to be pressuring importers.

There was only a modest rise in imported apparel prices so we can hope the restraining effect coming from clothing will continue. For the Fed, core prices, which exclude food and energy, are edging up but remain at what I consider a reasonable level. That may be higher than the Fed’s perceived target, but that target is just too low given the history of these prices. This report gives the Fed some cover to lower rates further, which is expected. As for the markets, this report should be received quite well by both bond and equity investors as it does not point to inflation becoming a huge problem.

Joel L. Naroff, Commerce Bank

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