Prices in deflation territory
Consumer price index, or CPI, which measures the pace of price increases, fell by 0.7% in January 2015 following a 0.3% fall a month ago. The decline was mainly driven by lower gasoline prices. The energy index was down 9.7% for the month, and the gasoline index was down 18.7%—the biggest drops seen since December 2008.
The fall in crude prices has negatively impacted the VanEck Vectors Oil Services ETF (OIH) and the United States Oil Fund, LP (USO). This fall has reduced the prices of gasoline, helping ease the load on people’s fuel expenditures. Since this spending forms a significant portion of household expenses, it gives consumers freedom to spend on other things.
Consumer spending forms a large chunk of US economic output. An increase in consumer spending is important for the revenues of companies including Proctor & Gamble (PG), Wal-Mart Stores (WMT), and McDonald’s (MCD).
The highlight of this report was that in the 12 months leading up to January 2015, prices fell 0.1%, the first decline since October 2009. In December, consumer prices rose by 0.8% year-over-year. A low inflation reading has been a primary reason why the Fed hasn’t increased its rates. For more on this, read Monetary policy: When the doves beat the hawks.
An increase in the interest rate, which is partly dependent on the pace of inflation, is negative for Treasuries. Such an increase would affect the iShares Barclays 20+ Year Treasury Bond Fund (TLT) and the iShares Barclays 7-10 Year Treasury Bond Fund (IEF), among others.
Treasury prices fall as a result of an increase in yields since prices and yields are inversely related.
Energy index tanks
The energy index is down 19.6% from a year ago. Meanwhile, the gasoline index—all types—is down a staggering 35.4% from a year ago. Another volatile input in the consumer price index, or CPI, food price. This was flat in January 2015 after having risen by 0.2% in December. The eating out index rose by 0.2% after a 0.3% rise in the previous month.
Core inflation rises
Core inflation, which measures the prices of all goods excluding fuel and energy, rose by 0.2% in January 2015 after having increased by 0.1% in December 2014. Year-over-year, core prices were up 1.6%. Fuel and energy costs are excluded from this calculation as they are volatile in nature and susceptible to price shocks. This can distort the inflation picture. And so, aside from overall inflation, a core-inflation index is also needed.
In the next three articles in this series, we’ll look at the housing market–related indicators that were released last week.