CPI Released, Meets Expectations

The Consumer Price Index (CPI) for September was released today and showed, on a year over year basis, a steady inflation rate of 2.1%, matching expectations. In the past, the CPI was the Fed’s primary measure of inflation, however, it has taken a liking to the Personal Consumption Expenditures (PCE), which replaced the CPI as the primary inflation measure some time ago (I think it was back in the 80’s, but I could be wrong on that).

So What?

Ah, the question on everyone’s mind, right? Well, even though the Fed doesn’t use the CPI as it’s favored inflation measure, it still has some pull on Wall Street, so it’s a good thing if it doesn’t sway too far from expectations. That goodness factor is multiplied by the recent Fed Funds rate drop. I’ve mentioned before that recent interest rate drop could potentially lead to greater inflation, and that, in order to prevent this, the Fed needs to balance interest rate cuts against the likelihood of inflation.

Investors understand this, so, being the over-reactive bunch that they are, they were just looking for higher inflation to gauge whether the rate cut will have a long-term negative affect. They were all waiting to see bond prices drop, and when the CPI came out to match expectations, they all wiped the sweat off their foreheads and went back to trading, leaving bond prices and mortgage rates steady.

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