US Gov: Feb CPI, Inflation Tame

The U.S. government CPI data released this morning is reporting that energy and commodity prices during February 2008 dropped! I'm not sure what planet they were living on, but the consequence is a stout rally in stock market futures. It also makes a near certainly the likelihood that the Fed will lower interest rates aggressively next week when the FOMC meets. Fed Fund futures are predicting a 75 basis point cut with nearly 100% certainty.

Perhaps there is an explanation for this clearly erroneous number. If the data was collected in the early days of the month, when crude oil prices fell to $86.34, it is possible that the reported data accurately recorded a price drop from earlier figures. However, since the consequence of this CPI report is 1) further aggressive Fed easing and 2) an even weaker US Dollar, it is even more likely that future inflation data will heat up even more.

If the data for CPI and commodities was collected prior to the most recent run-up occurred, then the market reaction, combined with next month's explosive numbers, will both add even greater fuel to inflation down the road. This CPI report will provide the Fed with cover to ease even more aggressively, thus further weakening the dollar and likely igniting still higher inflation and commodity prices.

It appears that just about everyone suspects this CPI report as containing bad data, and this simply increases the likelihood that CPI will go much higher in future months. Perhaps it will also moderate the impact if market participants view the CPI report with suspicion.