Inflation Still Around, But in Check; Fed to Buy Treasuries

The Consumer Price Index (CPI) increased in February slightly more than expected.  While this shows that inflation is still hanging around despite the economic decline, it is being held in check by the lack of economic activity.

From the U.S. Department of Labor, Bureau of Labor Statistics:

On a seasonally adjusted basis, the CPI-U increased 0.4 percent in February after rising 0.3 percent in January. The energy index rose 3.3 percent in February following a 1.7 percent increase in January as the gasoline index rose 8.3 percent in February after a 6.0 percent increase in January. In contrast, the indexes for fuel oil and natural gas both declined in February. About two-thirds of the all items increase was due to the rise in the gasoline index. Compared to the July 2008 peak, the energy index was 29.2 percent lower and the gasoline index was down 44.0 percent. The food index turned down slightly in February, falling 0.1 percent.

The food at home index fell 0.4 percent with five of the six major grocery store food group indexes posting declines in February. The index for all items less food and energy rose 0.2 percent in February, the same increase as in January. The indexes for new vehicles and apparel increased substantially in February, and the indexes for rent and owners’ equivalent rent increased slightly. Partly offsetting these increases were continuing declines in the indexes for lodging away from home and airline fares.

The food and beverages index declined 0.1 percent in February after rising 0.1 percent in January. The food at home index, which declined 0.1 percent in January, fell 0.4 percent in February. Within food at home, the dairy and related products index fell 2.4 percent in February, with the milk index declining 5.7 percent. The milk index has declined 10.0 percent over the past year. The fruits and vegetables index was the only major grocery store food group to post an increase, rising 0.4 percent in February after declining in each of the past five months. The other four groups posted modest declines, from 0.1 percent for the meats, poultry, fish and eggs index to 0.5 percent for the cereals and bakery products index. Over the last year the food at home index has risen 4.8 percent. Among the major grocery store food groups, the cereals and bakery products index had the largest increase over the past year at 8.9 percent, while dairy and related products was the only index to decline, falling 1.7 percent. Among the other indexes within the food and beverages major group, the food away from home index rose 0.3 percent in February, while the index for alcoholic beverages declined 0.2 percent, the first decline since December 2005.

The housing index was virtually unchanged in February for the third straight month. The shelter index, which rose 0.2 percent in January, was virtually unchanged in February. The indexes for rent and owners’ equivalent rent both rose 0.1 percent in February after increasing 0.3 percent in January. The lodging away from home index fell 1.8 percent in February, the fifth straight monthly decline. It has declined 5.7 percent over the past year. The index for household energy fell 0.2 percent in February and was down 8.1 percent from its July peak. Within household energy, the index for fuel oil fell 3.8 percent and the index for natural gas declined 1.6 percent, while the electricity index rose 0.5 percent. The index for household furnishings and operations rose 0.2 percent in February after declining 0.1 percent in January. Over the past year, the housing index increased 1.9 percent, with the shelter index up 1.7 percent.

The index for transportation rose 1.9 percent in February after a 1.3 percent increase in January. The new and used motor vehicles index rose 0.5 percent in February. The new vehicles index increased 0.8 percent in February, while the index for used cars and trucks declined 1.7 percent. The motor fuel index rose 7.6 percent in February but was down 35.4 percent over the past year. The airline fare index fell in February for the sixth straight month, declining 2.6 percent, and has fallen 14.0 percent since August 2008. The transportation index has declined 11.0 percent over the past year.

The apparel index rose 1.3 percent in February after increasing 0.3 percent in January. The index for men’s and boys’ apparel rose 2.8 percent and the index for women’s and girls’ apparel advanced 0.8 percent.

(Before seasonal adjustment, apparel prices rose 3.5 percent in February and were up 0.8 percent over the past year.)

Among other CPI groups, the medical care index rose 0.3 percent with the prescription drug index rising 0.6 percent. The index for recreation rose 0.4 percent as the indexes for toys, for sporting goods, and for pets, pet products and services all increased. The education and communication index rose 0.2 percent, with the education index rising 0.4 percent and the communication index virtually unchanged. The index for other goods and services advanced 0.2 percent with the tobacco and smoking products index posting a 0.7 percent increase.

Federal Reserve to Buy Treasuries

Also, the Federal Reserve announced that it will buy back long-term Treasury bonds.  This is a monetary policy move known as  ”quantitative easing.”  The Fed buys government debt, that has the effect of pumping more money into the capital markets, because the private money that was in Treasuries will now go elsewhere to find a better yield (buying Treasuries increases the price of the bonds and, inversely, drives down the yield).

Here are some analytical observations put together by the team at RGE Monitor:

Overview: The Fed announced in December 2008 that it will buy up to $500bn in agency MBS and up to $100bn in agency debt by the end of Q2 2009. On March 18, 2009 the Fed decided to purchase “up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of agency MBS to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.” In addition, the Fed decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

March 18: Upon Fed intervention, the mortgage rate drops from 5.16% to 4.68% and the 10-year Treasury yield drops to below 2.5% (CNN, FT)

Feb 9, Calculated Risk: Based on historical data, the Fed would have to push the Ten Year yield down to around 2.3% for the 30 year conforming mortgage rate to fall to 4.5%. 

March 18 economists react: if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year (Greenlaw, MorganStanley)

cont.: ForwardCapital: With the declines in house prices already in the books and the probability that house prices will register further significant declines, the number of current homeowners who will be able to successfully refinance will be pared down accordingly as greater numbers find themselves treading water if not under water.–> see Congress and Treasury Scale Up Measures to Reduce Foreclosures

This is a very positive move for the economy and should put some more support under the recent stock market rally in the short-term.  There are still plenty of economic problems, however, so enjoy the rally, but be sure to take profits where possible.  For instance, General Mills missed earnings expectations and lost 10 percent of its value in one day.  If consumers aren’t buying Cheerios like they used to, then nothing is safe.