- The Washington Times - Friday, February 21, 2003

WASHINGTON, Feb. 21 (UPI) — The Labor Department reported Friday the all urban consumer price index, a key measure of inflation at the retail level, rose 0.3 percent in January as consumers faced the highest energy costs in nine months.

The core index, which excludes food and energy items, rose 0.1 percent after rising 0.2 percent during the final month of 2002 and 0.2 percent in November.

Economists on Wall Street were expecting the CPI to rise 0.3 percent during the first month of 2003 after rising only 0.1 percent during December and November. The core rate was expected to rise 0.2 percent.

The consumer price index is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation.

The consumer price index is the most widely followed indicator of inflation in the United States. Just knowing what inflation is and how it influences the markets can put an individual investor head and shoulders above the crowd.

Inflation is a general increase in the price of goods and services. The relationship between inflation and interest rates is the key to understanding how data like the CPI influence the markets.

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation, because you know that the $100 won't be able to buy the same amount of goods and services a year from now, as it does today. If you were in Brazil where prices can double every couple of months, you might want to charge 400 percent interest for a total payoff of $500 at the end of the year.

In the United States, the CPI tells us that prices are rising about 2 percent a year, so you only have to charge 2 percent interest to recoup your purchasing power at the end of the year. You might want to add in a few more percentage points for default risk and the opportunity cost, but the key variable in what interest rate you charge is the rate of inflation.

That basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bonds and T-bills. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates accordingly. The effect ripples across stocks, bonds, commodities, and portfolios, often in a dramatic fashion.

Investors, preoccupied by worries the economic recovery might fizzle, have paid little attention to inflation statistics recently. Fed Chairman Alan Greenspan has described the risk of inflation in the near term as "remote."

On Thursday, the Labor Department reported the Producer Price Index, a key measure of inflation at the wholesale level, posted its largest increase during January in 13 years as the cost of oil skyrocketed.

The government agency reported the PPI surged 1.6 percent during the first month of 2003 — its largest rise since climbing a 1.9 percent back in January 1990.

Economists were expecting the PPI to rise 0.5 percent during the month after falling a revised 0.1 percent in December, which the government originally reported as no change during te final month of 2002.

Excluding the often volatile food and energy sectors, the so-called core PPI jumped 0.9 percent after falling 0.5 percent in December. The rise in the core-rate was the largest since a 1 percent hike posted in December 1998.

The latest report on the CPI showed energy prices, which account for about 6 percent of the index, surged 4 percent — their largest gain since April of last year and after posting a 0.4 percent decline in December.

Heating oil costs jumped 8.6 percent, the largest gain since August 2000 and natural gas prices were the highest in two years, the report showed.

The average cost of a gallon of home heating oil has rocketed to over $2 a gallon along the nation's East coast, partly due to the cold weather.

The report showed gasoline prices skyrocketed 6.6 percent, also their largest rise since last April and following a decline of 1.4 percent a month earlier.

The average retail price of gasoline rose in January to $1.50 a gallon, according to the U.S. Department of Energy. The cost has since surged to over $2 a gallon for self-service in parts of the East, including New York City and Long Island.

Housing prices, which account for 40 percent of the index and include some energy costs, rose 0.4 percent after rising 0.2 percent in the final month of last year. The cost of shelter, which includes rents, rose 0.3 percent after rising 0.2 percent during December.

Food prices, which account for 15 percent of the index, fell 0.2 percent after rising 0.2 percent a month earlier and medical care costs inched up 0.1 percent after rising 0.4 percent in December.

The report showed personal computer prices fell 1 percent after falling 1.5 percent during the previous month.

Clothing costs fell 0.9 percent after falling 0.5 percent a month earlier. New vehicle prices fell 0.9 in January after slipping 0.2 percent in December, airfares fell 0.6 percent and prices for tobacco products were unchanged.

In a separate report, the Labor Department said average weekly earnings adjusted for inflation were unchanged in January after declining 0.1 percent in December.

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