Economic Data Analysis - Chew on This!

Glue in your dentures tightly, because there's a plateful of economic analysis to chew on today. Between today and yesterday, we absorbed the newest inflation measure, two retail reports, a spot of housing news mixed with mortgage and foreclosure data, an updated energy outlook and weekly inventory, business inventories and import and export prices. Chew on that morsel before you choke on it! We are not schooled in the Heimlich Maneuver here at "The Greek." This article focuses on the big inflation report.

Consumer Price Index (CPI)

The market is rising today on what, on the surface of things, looks like a positive development for inflation. However, the published headline numbers alone do not tell the whole story. Simply looking at the result, would be like passing a great impressionist's painting from three feet away. You really need to back up, take a close look, blink and look again, to understand and make good use of the data. So, let us do that for you.

The headline CPI increased 0.2% in April, while the core figure (ex-food and energy) rose 0.1%. Both results were a tenth of a point below consensus expectations, undeniable good news. Still, Core CPI looked good on the surface, but let's take a step back and look closer at the components. Energy was relatively unchanged, but behind that apparent stagnation were volatile factors that simply moved counter to one another. This created the illusion of stability.

The energy index advanced 1.9% in March, but was relatively unchanged in April. Here's why... In April, petroleum pricing actually backed off, and we know things have changed dramatically for the worse again in May, so we take little solace from this data. Still, while petroleum based energy declined 1.6%, the energy services index saw price rise of 2.5%. This means that inflation is trickling through the system on the energy end of things. We see this happening plain and evidently in gasoline pricing, and with news that some refiners are scaling back capacity. Gasoline refiners, like Valero (NYSE: VLO), Tesoro (NYSE: TSO), Sunoco (NYSE: SUN), Hess (NYSE: HES) and others have been losing money making your cars run, so they've taken to scaling back capacity, thus forcing the competitive marketplace to allow price increase. So, next month, when petroleum prices come in higher in the CPI data, and services continue to rise as well, inflation might also present a more frightening picture for those only passing within three feet of it.

Inflation was clearly evident on the food end of the CPI table. The food index component of the index increased 0.9% in April. The index for food at home (vs. restaurant dining) rose 1.5%, reflecting increase across all major grocery store groups. So, agricultural born inflation continues to more readily pass through to consumers, which makes perfect sense. Food is a need item, a commodity driven resource, and is mostly dominated by large processors who can pass price rise through easily to retail, who of course will pass it on to consumers. Margins are tight when it comes to plain foods, where differentiation is hard to come by. Price increase will therefore be passed forward quickly and efficiently.

So, we say, hold your horses on the good-bye party the market is throwing for inflation. Its demise is greatly overstated.

See our disclosure at the Wall Street Greek website. Article interests AMEX: DIA, AMEX: SDS, AMEX: SPY, AMEX: DOG, AMEX: QLD, Nasdaq: QQQQ.