Another day, another opportunity to see whatever you want to see in the economic data. The latest example arrived yesterday within the packaging of consumer prices, which at once threatens and calms. The source for the duality comes by way of yesterday’s report on January consumer prices, offering a now-familiar refrain of maybe we’re in trouble, and maybe we’re not, a la producer prices.
Top-line inflation advanced by a seasonally adjusted 0.7% last month, according to the Labor Department, up dramatically from December’s slight decline in CPI. The jump was also above the consensus 0.5% forecast for January, and now stands as the highest monthly rate of increase since September’s Katrina-induced 1.2%.
But if the news has got you down, why not keep reading to find something more encouraging to lift your spirits? As with previous bouts of CPI-defined inflation, last month’s ascent is primarily a function of energy prices, a point that comes through loud and clear in the far-less bubbly core CPI, whose pace of ascent was a relatively cool 0.2% in January.
Top-line inflation, in sum, continues to raise warning flags, while the core CPI keeps telling the bond market what it wants to hear. The question is whether anyone will ring a bell when and if energy driven inflation becomes a clear and present danger as opposed to something barely worth mentioning beyond a footnote in future textbooks.

Just as consumer prices suffer a bifurcated existence, so too do the best guesses of what it all means. Speaking for the optimists, Jim Awad, chairman of Awad Asset Management, told Reuters via MSN Money, “The Fed can’t justify too many rate increases with mild inflation.”
Maybe. But while we’re waiting to find out if that thinking is prescient of naive, let’s take a bracing visit over to the dark side, if only for some perspective to see how the other half thinks. Representing the alternative view is Richard Sichel, chief investment officer at Philadelphia Trust Co., who also spoke with Reuters on Tuesday, reasoning, “We can’t dismiss the 0.7 number because people actually do spend money on food and energy. That’s something to be thinking about and that’s something that the Fed might have to be thinking about.”
Joel Naroff, president of Naroff Economic Advisers, emphasized the point, telling BusinessWeek: “Consumers continue to be battered by rising costs. It’s tough out there for most households.”
And then there’s the Chicago Fed President Michael Moskow, who tells the Wall Street Journal today (subscription required) that “We know that increases in energy are going to pass through to the core.” In fact, Moskow warns that there’s a “significant risk” that higher energy prices may do just that at some point, even if the evidence to date is thin.
If there’s a fissure in the explanation of January’s consumer prices, it wasn’t always obvious in the equity and bond markets, both of which managed to gain ground yesterday. The stock market was particularly upbeat, elevating the trusty Dow Jones Industrials to a four-year high on Tuesday. And with oil prices retreating today, the core CPI’s relatively calm behavior takes on even greater significance for those who think inflation is no longer a threat. Indeed, of the ten S&P 500 sectors, financials were yesterday’s big winner, rising 1.8%, or more than double the S&P’s gain for the day.
“We see the light at the end of the tunnel,” said Louis Navellier, an equity manager of $5 billion at Navellier & Associates Inc., in an interview with Bloomberg News yesterday. “There’s less uncertainty now. It’s like we have a road map.”
And who’s to say he’s wrong? Certainly not the bond market, which saw fit to celebrate as well, albeit a bit more modestly, but celebrate nonetheless. Traders in the 10-year Treasury weren’t shy about buying yesterday, driving the yield on the benchmark bond down to its lowest close since February 10.
Of course, to judge by Fed funds futures, expectations of more rate hikes remain the best guess on the short end of the yield curve. Indeed, said curve remains inverted in Treasuries proper. As of yesterday, the two-year Note yields 4.66% vs. 4.53% in the 10 year or 4.84% in the newly revived 30-year Treasury. The jury’s still out on whether that’s also a trend worthy of celebration.