This morning’s report on consumer prices for August is the gift that the markets have been looking for.
Inflationary pressures eased last month, the Bureau of Labor Statistics reported, with the CPI advancing at just 0.2% in August, down by half from July’s 0.4%. The core rate of inflation, meanwhile, held steady: CPI less food and energy rose 0.2% last month, as it did in July.
The big contributors to the slowing of pricing pressures were energy and transportation. Energy prices gained by a mere 0.3% in August, a universe below July’s 2.9% surge. The pace of transportation-related price hikes also took a healthy dive, registering a 0.2% rise, down sharply from the previous month’s 1.6% climb.

August, in short, took a fair chunk of the momentum out of inflation’s sails. The core rate of CPI is now running at an annual 2.8%. That’s still a bit on the high side as far as the Fed’s upper range of tolerance is concerned. Bringing core CPI down to the low 2% range is the immediate goal, and a prudent one if the central bank is still concerned (as it should be) with managing inflation as a long-term proposition. As such, the Fed will have to remain vigilant. But for the moment, there’s no immediate sign that inflationary pressures are accelerating. Confirmation that the trend is more than a blip will only come in future months, but hope has suddenly taken a big step up in valuation.
Indeed, with oil prices down around 10% so far this month, a repeat performance of easing consumer prices looks on track for the September CPI report. Next Wednesday’s FOMC meeting at the Fed, in short, will have fresh data to lean on for rationalizing keeping interest rates on pause.
Mr. Market has been anticipating no less. The S&P 500 has been climbing steadily if slowly since mid-July, and on Wednesday touched its highest level since May. The bulls have been in charge in the bond market too, pushing the yield on the 10-year Treasury Note down under 4.8% for much of this month–the lowest since March.
Year to date through last night’s close, the total return is 6.9% for the S&P 500, and 2.2% for the widely watched Lehman Brothers Aggregate Bond Index. The upward momentum in equities is also evident elsewhere on the planet. MSCI EAFE, in dollar terms, is up more than 13% so far this year, and MSCI Emerging Markets (also in dollars) has climbed nearly 8.9% in 2006 through yesterday.
With so much having gone wrong in the recent past, the markets are inclined to celebrate now that a number of things seem to be going right. For the moment, the bulls can breathe a sigh of relief.
Having anticipated the current good news, where do the markets go from here? More of the same? The markets, after all, are about valuing the future, not the past.
But let’s not spoil today’s party with awkward questions. Let’s save such inquiries for next week. Meanwhile, enjoy the show.