Earlier I posted a comment from the FT’s Lex column warning about being too complacent on inflation. NBF Financial adds its usual smart comments, warning of increasing inflationary pressures underlying the good core CPI release.

The CPI data released on Friday should help appease fears of over-reaction by the Federal Reserve. The all-items CPI rose 0.16% but the core dropped 0.13% on the month. This was the first decline in just about a year and the biggest monthly contraction since November 1982. The weakness in the core CPI remains concentrated in its all-important service component where 12-month inflation falling fell to a record low of 0.9% in January. As today’s Hot Chart shows, however, this weakness stems mostly from shelter. If we exclude rent of shelter, inflation in core services is actually running at a 2.3% clip.

Bottom-line: Because of the large weighting of its “rent of shelter” component (41% of the index), core CPI inflation will remain tame for the foreseeable future. In our view, excluding shelter from the core CPI provides a better gauge of underlying inflation trends and the pricing power environment for U.S. corporations.  



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