Impact of the Fed taper: The Treasury International Capital report

Part 6
Impact of the Fed taper: The Treasury International Capital report (Part 6 of 8)

Will February’s CPI and PPI releases impact the Fed funds rate?

Both the Producer Price Index (or PPI) and the Consumer Price Index (or CPI) are headline inflation numbers issued by the Bureau of Labor Statistics (or BLS). The PPI is was released on Wednesday, February 19 and the CPI on the following day.

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What is the Consumer Price Index (or CPI)?

The Consumer Price Index measures the change in the average price level of a fixed consumption basket of goods and services. The index shows the change in price levels from the index base period (currently 1982–1984 represents the base or 100). Changes in the CPI are commonly called the rate of inflation.

The Consumer Price Index (or CPI) for all urban consumers increased 0.1% in January on a seasonally adjusted basis and increased 1.6% year-on-year on an unadjusted basis. Increases in household energy and electricity indices were chief contributors to the increase.

What is the Producer Price Index (or PPI)?

The headline PPI measures price change in finished goods, termed “for Final Demand.” Price changes for goods, services, and construction sold to final demand are captured by the headline number.

The PPI for Final Demand (or FD) goods increased 0.4% in January, on a seasonally adjusted basis led mainly by increases in prices of pharmaceutical preparations which went up 2.7% accounting for about a quarter of the increase in PPI. On an unadjusted basis, prices for finished goods increased 1.2% for the 12 months ended January 2014 compared with a 1.1% advance in December 2013.

The index for final demand services was up 0.1% in January compared to a 0.1% decrease in December. In January, the indexes for both final demand services less trade, transportation, and warehousing and for final demand trade services moved up 0.1%. (Trade indexes measure changes in margins received by wholesalers and retailers.) Conversely, prices for final demand transportation and warehousing services declined 1.1%. A large part of the increase in the Final Demand Services Index was the increase in prices for loan services (partial), which climbed 2.1%.

An increase in the PPI and CPI will imply that inflation is increasing. With other things remaining constant, it can mean that demand for goods and services is increasing and the economy is recovering. Higher inflation will also mean higher nominal yields and lower prices for bonds, and vice versa.

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