Stock and bond markets dropped sharply on an unexpectedly high reading for the US Consumer Price Index in January. Headline CPI rose by 0.5% and core CPI (minus food and energy) by 0.3%. At 8:50 am, US Dow-Jones Industrial Index futures had fallen by 238 points and the 30-year US Treasury bond lost 12/32nds. The US dollar was little changed.
On close examination, though, the report is extremely odd. The single biggest contributor to the unexpectedly high increase in the Core CPI (0.3% vs. an expected 0.2%) was a big jump in the price of apparel. Without apparel, the core reading would have been just 2.4% rather than 3%. Given that apparel prices change massively between December and January due to post-Christmas discounting, the entire difference may be a result of seasonal adjustment issues. The rate of price change for the most important item in the core CPI basket, shelter, was actually slightly lower in January than December. As noted, apparel explains 6/10ths of the difference between the actual and predicted core CPI number. The rest of it is explained by motor vehicle insurance and physicians’ services.
In short, the report should not be taken too seriously. In a globalized world, with massive overcapacity in the garment industry, and vast changes in online retailing for clothing, and tectonic shifts in consumer preferences towards cheaper generic brands rather than expensive labels–it is hard to swallow the idea that the fate of the US economy hangs on the Bureau of Labor Statistics’ measurement of apparel prices over the past Christmas season.