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How to Read a CPI Report

What investment professionals see.

An illustrative image of John Rekenthaler, vice president of research for Morningstar.

Unwelcome News

On Feb. 13, the Bureau of Labor Statistics released its report for January’s Consumer Price Index. In response, the US stock market immediately sank, with the Morningstar US Market Index losing 1.49% on the day. One cannot always know why equities trade as they do, as stocks do not answer questions, but this time the cause was obvious: Investors disliked the CPI announcement.

Let’s try to understand why. Applying its standard format, the survey began: “The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in January on a seasonally adjusted basis, after rising 0.2% in December, the US Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.1% before seasonal adjustment.”

The Annual Perspective

Articles about CPI releases often highlight the 12-month change. Thus, Barron’s headline covering that report read, “Inflation Rose By a Bigger-Than-Expected 3.1% in January.” Two months before, CNBC had written, “Inflation slowed to a 3.1% annual rate in November.” It’s understandable that journalists would view the data in that fashion. After all, the Bureau of Labor Statistics itself opened a discussion of December’s report by writing, “Consumer prices for all items rose 3.4% from December 2022 to December 2023.”

Understandable, but unhelpful. The annual figures have two major drawbacks. First, those measures are rolling. Because what falls off rolling computations is as important as what was added, one cannot interpret their changes simply by comparing one month’s reading with that of the previous month. Second, while using “all items” is indeed the correct starting point, as it represents the burden faced by consumers, doing so buries key information.

As a result, the 12-month figure for all items is analytically immaterial. The chart below shows that statistic for the trailing three years.

Trailing 12-Month CPI

(Trailing % change in 12-month CPI, seasonally adjusted and for all items, February 2021 - January 2024)

Nothing in that chart suggests that January’s CPI report was unfavorable. If anything, its news appears to have been positive, reversing the previous month’s increase. Yet not only was January’s report met with derision, but on the day the December 2023 CPI figures were released, stocks rallied. Twelve-month numbers are illusory. Use them for understanding what was, but not for considering what may be—which, for investment prices, is all that matters.

Monthly Numbers

Sometimes, the monthly changes—in January’s case, 0.3%—were featured instead. Let us test whether they are more useful. The next chart depicts the seasonally adjusted monthly percentages for all items over the past three years.

Monthly Change

(Monthly % change in CPI, seasonally adjusted and for all items, February 2021 - January 2024)

Much better. Per the monthly results, January’s inflation was the highest in four months. That would seem to justify investors’ disappointment. What’s more, the last time that the rise in the monthly CPI exceeded January’s amount of 0.3%, during the months of August and September 2023, stock prices fell on the days those results were announced. The marketplace largely ignores rolling 12-month outcomes, but it pays keen attention to the month-by-month changes.

Core Inflation

Another way of evaluating monthly activity is to strip out food and energy prices. Not only are they volatile, thereby potentially distorting the “all items” data with sharp increases one month and then declines during the next, but their effects often lie outside the Federal Reserve’s control. After all, for all its powers, the Fed can neither drill more oil nor hatch additional eggs. Economists therefore tend to emphasize a statistic that they call core CPI, which eliminates those two factors.

Core Inflation

(Monthly % change in CPI less food and energy, February 2021 - January 2024)

In recent months, the economists’ preferred measure has been less correlated with the market’s same-day reaction than has been the alleged cruder all items statistic. Case in point: Although August’s 2023 CPI release was widely heralded as coming in hotter than expected, leading to the Nasdaq composite losing 1% of its value on the day of the announcement, the core CPI measure registered its lowest level in two years. Essentially, investors fretted about spiking gas prices while economists said, “What, me worry?”

Score one for the economists. The US stock market has since gained 14%, which makes for a handsome annualized rate. The short version of a very long story is that economists usually disregard changes in food and energy prices, consumers never do, and the stock market lands somewhere in the middle. My sympathies tend toward the former, but it must be confessed that this mindset is ill-suited for a secular rise in commodity prices, as in the 1970s.

(In addition to core CPI, economists apply several other adjustments to the all items computation, resulting in such exotica as the Sticky Price CPI, Sticky Price CPI Less Food and Energy, and Sticky Price CPI Less Food, Energy, and Shelter.)

The Big Unknown: Shelter Costs

At least for the moment, the food and energy inflation debate has been decided in favor of the economists. The average price of food has risen by a modest 2.6% over the past year (in this instance, using the 12-month figure is appropriate). Meanwhile, oil prices are 20% below their February 2022 levels. However, the economists also claimed that shelter prices would subside, albeit with a lag, because rents are only periodically adjusted. That, sadly, has not been the case.

Shelter Costs

(Monthly % change in CPI shelter costs, February 2021 - January 2024)

Yikes! It’s one thing to shrug off housing inflation in the summer of 2022, when the Fed had barely begun to raise interest rates. It’s quite another to do it 18 months later, when those rent prices that were supposed to be coming down are not showing up in the data. At 0.6%, the increase in January 2024′s CPI shelter costs matched those of May, June, and July 2022. Where is the progress?

Thus, the most relevant data point in current CPI reports is neither the annual calculation, nor the monthly change, nor even core inflation and its variants. It is whether shelter costs have well and truly peaked. If so, then the Fed truly can begin to lower interest rates with some confidence that its previous actions had full effect. If not, though, then US interest rates will remain in limbo.

These days, it’s all about the shelter.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.

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About the Author

John Rekenthaler

Vice President, Research
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John Rekenthaler is vice president, research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Rekenthaler joined Morningstar in 1988 and has served in several capacities. He has overseen Morningstar's research methodologies, led thought leadership initiatives such as the Global Investor Experience report that assesses the experiences of mutual fund investors globally, and been involved in a variety of new development efforts. He currently writes regular columns for and Morningstar magazine.

Rekenthaler previously served as president of Morningstar Associates, LLC, a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. During his tenure, he has also led the company’s retirement advice business, building it from a start-up operation to one of the largest independent advice and guidance providers in the retirement industry.

Before his role at Morningstar Associates, he was the firm's director of research, where he helped to develop Morningstar's quantitative methodologies, such as the Morningstar Rating for funds, the Morningstar Style Box, and industry sector classifications. He also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

Rekenthaler holds a bachelor's degree in English from the University of Pennsylvania and a Master of Business Administration from the University of Chicago Booth School of Business, from which he graduated with high honors as a Wallman Scholar.

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