Release Explanation: The CPI measures the average price of a fixed market basket of goods and services purchased by consumers, and therefore gives an overall read of inflationary pressures. It is the most widely used Inflation indicator of central banks, institutions, and governments. It is used to calculate cost of living numbers for government programs. Each regional central bank will have their own CPI target rate, and each will differ in line with the way they individually want to control the aspects of their own economies.
 
It can sometimes overstate inflation because it does not reflect price changes in new technology goods which are often declining in price as new innovations come into the market. Despite these criticisms, it remains the benchmark inflation index worldwide. CPI can be greatly influenced in any given month by movement in volatile food and energy prices, and therefore it is important to look at CPI excluding food and energy, commonly called the “core rate of inflation.


Within the core rate, some of the more volatile and closely watched components are apparel, tobacco, airfares, and new car sales. In addition to tracking the month over month (m/m), the year over year (y/y) change in core CPI is seen by economists as the most reliable read of the underlying inflation rate.
 
This is the be all and end all of economic releases. This report sets the tone for economic growth or contraction, and therefore eventually affects most other releases. The gauge of inflation is a report that moves markets because it gives a central bank the information they need to make rate decisions. This therefore is a big market mover as institutions adjust existing or planned positions in response to the rate of inflation and its impact on a currency, i.e. CPI higher, currency appreciation, CPI lower, currency depreciation.


Trade Desk Thoughts: U.S. CPI rose 0.3% in January, the Bureau of Labor Statistics said today. It was the first monthly increase in the last three months. For the year, inflation was unchanged. Excluding food and energy, the so-called core rate of inflation was 0.2% last month and rose by 1.7% for the year.


Decreasing energy costs are generally a plus for the economy, said Matthew Carniol, chief currency strategist at TheLFB-forex.com. However, some Fed officials saw a 'risk' of 'excessively low inflation' while 'a few even saw some risk of deflation' at the January meeting.


Unrounded, the CPI rose 0.282% last month. The core CPI rose 0.177% unrounded.


Leading CPI higher was the energy index, which climbed 1.7% in January, its first increase in six months. Energy was still 31.4% below its July 2008 peak level. Within energy, the gasoline index rose 6.0% in January after a 19.3% decline in December.


The increase in core CPI was mainly due to larger advances in the indexes for rent and owners’ equivalent rent and upturns in the indexes for new vehicles and apparel.


The compound annual rate of inflation for the three months to January was -8.4%, led by a 65.4% decrease in energy costs. Core CPI increased at a 0.9% compound annual rate over the same period.


Forex Technical Reaction: S&P futures were trading 1.76% lower on the day prior to the report. The dollar was recently higher against the euro and Australian dollar, and about even on the yen and pound. After the report, futures improved to a 1.6% decline and the dollar weakened against the higher-yielders while it rose slightly against the yen.