The Bureau of Labor Statistics announced this morning that the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2% in January and 0.3% excluding food and energy. Year-over-year increases are 2.1% and 2.7%, respectively. The increases were slightly higher than expected and have halted, at least temporarily, the rally in bond prices that began in late January. But a close look at the numbers gives us more reason for comfort than worry about inflation prospects.
Item: Energy costs fell 1.5% in January including a 3.1% decline in petroleum-based energy. Fuel oil costs dropped 5.6% and natural gas prices were 3% lower than in December. Gasoline prices also fell 3% and are 2.7% lower than in January 2006.
Item: Owners' equivalent rent, the proxy for housing costs and the largest single component of the CPI, rose 0.2%, following increases of 0.3% in December and 0.4% in November. This means that the pace of increase in rents is slowing as more vacant condos, bought as speculative investments in hot markets, are being rented rather than sold for quick profits.
Item: The biggest increase in January was in tobacco and smoking products, where prices jumped 3.1%. Cigarettes are a special case whose prices are driven far more by taxes than by market forces.
Today's data won't make the Fed change course, but it shouldn't add fuel to inflation fears either.