Consumer Price Index Reaction Proves Markets Are Still Inefficient

Yesterday we had warned that the financial markets were bracing for the inflation card when the latest Consumer Price Index (CPI) was released. That has now come to pass, and it shows that the markets are still no better at anticipating news than they were a year or two ago. The reaction where the Dow Jones industrials went from up over 100 in futures to down 300 and then recovered back to “only” being down 50 points is just more evidence for the thesis that the so-called efficient market theory is a myth.

After everything we had seen thus far from economic numbers, it should have pointed to higher annualized inflation. We saw 2.9% wage increases in January’s employment report, and the ISM and purchasing manager reports showed higher prices paid and received and wage pressures. The regional Federal Reserve reports have signaled the same.

The U.S. Department of Labor released CPI for January as a direct measure of consumer inflation. Compared with December, the CPI was up 0.5% on the headline all-index reading and it was up 0.3% on the core reading, which excludes volatile food and energy prices.

Bloomberg’s consensus estimate on the headline all-items CPI was 0.3%, as well as 0.2% on the core CPI reading. Dow Jones consensus estimates called for a 0.4% gain on the headline CPI and up 0.2% on the core CPI.

The annualized year-over-year gains are where the real obvious inflation numbers come into play. Inflation for consumers was up 2.1% on the headline CPI for January of 2018 from January of 2017. The core reading was up 1.8% for January’s annualized number. These consensus estimates were projected by Bloomberg to be 2.0% on the headline CPI and 1.7% on the core CPI. Dow Jones called for a 1.9% annualized headline CPI reading and a 1.7% annualized gain in core CPI.

The Bureau of Labor Statistics said of January’s CPI report:

The seasonally adjusted increase in the all items index was broad-based, with increases in the indexes for gasoline, shelter, apparel, medical care, and food all contributing. The energy index rose 3.0 percent in January, with the increase in the gasoline index more than offsetting declines in other energy component indexes. The food index rose 0.2 percent with the indexes for food at home and food away from home both rising.

And for the year-over-year comparisons, the bureau said:

The all items index rose 2.1 percent for the 12 months ending January, the same increase as for the 12 months ending December. The index for all items less food and energy rose 1.8 percent over the past year, while the energy index increased 5.5 percent and the food index advanced 1.7 percent… All the major energy component indexes increased over the past 12 months. The gasoline index rose 8.5 percent and the fuel oil index rose 22.5 percent. The electricity index rose more modestly, increasing 2.4 percent, and the index for natural gas increased slightly, rising 0.2 percent.

For a comparison to the prior month, the preliminary readings from December were as follows:

  • Headline CPI monthly change +0.1%
  • Core CPI monthly change +0.3%
  • Headline CPI year-over-year change +2.1%
  • Core CPI year over-year-change +1.8%

24/7 Wall St. had warned on Tuesday:

… investors and economists better expect that the inflation reading will be hotter than normal. They also likely already are bracing for the financial media to be talking about whether the Federal Reserve is behind the curve on raising interest rates.

Now what investors have to do is go back and look at the energy price action since the end of January. WTI crude was last seen trading under $58.50 per barrel, down from $65 on February 1, and after having been above $60 for effectively all of January. Crude traded within a band of $50 to $55 for the first two months of 2017.

Again, the efficient market theory is a myth.