CPI = Trouble

The Consumer Price Index (CPI) increased 0.4% in January. The expectatation was for an increase of 0.3%, so at least initially today's data doesn't seem too bad. But the reality is that the CPI is up 4.3% versus a year ago and up at a 6.8% annual rate in the past three months.

Energy prices are up 19.6% versus last year.

Food and beverage prices are up 4.8% versus last year.

Excluding food and energy, the “core” CPI was up 0.3% in January (0.311% unrounded) – the highest one-month increase in more than five years. The core CPI is up 2.5% versus a year ago and up at a 3.1% annual rate in the past three months.

According to FT Advisors' Brian Wesbury & Bob Stein, this data strongly suggests that the Fed "needs to stop ignoring inflation. In the past three months the CPI is up at a 6.8% annual rate. With the exception of the two months immediately following Hurricanes Katrina and Rita this is the largest gain since 1990. At 4.3% consumer inflation is higher than the 3.9% yield on the 10-year Treasury, and that’s before investors pay taxes on the interest. Even “core” consumer prices are accelerating, with ex-food/energy prices up at a 3.1% annual rate in the past three months. Long-term, the five-year moving average of overall inflation remains in a steady uptrend (see chart to the right). Monetary policy has been accommodative since late 2001, which means an already serious inflation problem will continue to climb in the years ahead."

While its impossible to ignore data and even more difficult to disagree with Wesbury & Stein's argument when they have this kind of data to back it up, it has to be acknowledged that M1 growth has been absolutely flat over the last 2-3 years. That, and the weaker economy, suggests that inflation may well tame over the next few quarters. For the market's sake it must or the Fed is going to be very hard pressed to make a claim for more rate cuts.

By the way Wolfe, this supports your post below... credit is given where credit is due, no pun intended.