Consumer Price Index Explosion

Mike Larson takes a closer look at the latest Consumer Price Index. Mr. Larson examines the Federal Reserve and it's decisions regarding tax cuts and reasoning behind those cuts.

On February 20, the latest Consumer Price Index figures hit the tape. Overall prices rose 0.4% on the month. The core CPI, which strips out food and energy, gained 0.3%. That was the biggest jump in 19 months. And it's not just one or two things driving the increase:

- Food and beverage costs rose 0.7%;

- Apparel costs climbed 0.4%;

- Medical care costs surged 0.5%;

- Education and communication prices leapt 0.4%; and

- And transportation prices jumped 0.5%.

In fact, the year-over-year rate of inflation is now officially hovering at 4.3%. Core inflation is running at 2.5%, well outside of the Fed's 1% to 2% preferred range.

Fed officials occasionally throw a few platitudes out there about how they're concerned about inflation. But actions speak louder than words. And the Fed's aggressive cuts in the face of $100 oil, $900+ gold, $10+ wheat, $5+ corn, $13+ soybeans and so on say everything about the Fed's commitment to fighting inflation. Policymakers are trying to ignore it because they're more worried about shoring up the ailing U.S. credit markets. They're hoping the market will just play along with the charade, accept the cuts as a necessary step to save the banks' bacon, and pay no attention to the potential long-term consequences.

But bond traders are not buying it anymore. In fact, they're selling. Long bond futures prices fell a bit more than seven points from their intra-day high on January 23 through their low this week. That's the market's way of telling the Fed that aggressive, short-term interest rate cuts could drive longer-term inflation and long-term interest rates higher.

"If it were just bond investors getting hit, maybe this wouldn't matter except to some Wall Street investment firms. But the rise in long-term rates could also be yet another headwind for the housing market. Simply because rates on longer term mortgages will follow rates on longer term bonds. They do not move with the fed eral funds rate, which is what the Fed has been cutting. That means the Fed cuts, designed to help housing, are actually driving financing costs on 30-year mortgages higher. In fact, figures from the Mortgage Bankers Association show that 30-year mortgage rates have increased from 5.5% in mid-January to 6.09% in mid-February. That surge caused mortgage application activity to plummet in the most recent week by more than 22%. In fact, the MBA index that tracks home purchase loans fell to its lowest level since early 2003," Mr. Larson states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspxBernanke-and-Fed-Ignore-Inflation-at-Nations-Peril-3

About Mike Larson and Money and Markets

Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC.

Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

Consumer Price Index Explosion

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