Consumer Price Index Unchanged, Confidence Slips Slightly

- The Consumer Price Index for February was unch. versus estimates of a .3% increase and a .4% gain in January.

- The CPI Ex Food & Energy for February was unch. versus estimates of a .2% gain and a .3% increase in January.

- The Preliminary Univ. of Mich. Consumer Confidence reading for March fell to 70.5 versus estimates of 69.5 and a reading of 70.8 in February.

BOTTOM LINE: Consumer prices in the US were unchanged in February, making it easier for Federal Reserve Chairman Ben S. Bernanke to cut interest rates to shore up confidence in the economy, Bloomberg said. The Consumer Price Index rose 4.0% year-over-year versus the long-term average of 3.1% and down from 4.7% in September 2005. The Core CPI rose 2.3% year-over-year versus the long-term average of 2.9% and down from 2.9% in September 2006. The cost of electricity fell by the most since December 2005. Declines in consumer prices were broad-based as the cost of clothing, automobiles and air fares all fell as companies try to lure customers with discounts. Medical care costs rose .1%, the smallest gain since March of last year. The S&P GSCI Agricultural Index Spot, the source of much inflationary angst, is down 4.0% today and looks like it possibly made a double-top. The 10-year TIPS spread, a good gauge of inflation expectations, is falling 8 basis points to 2.44%. It has plunged 24 basis points from yesterday’s highs. The ECRI Future Inflation Gauge is falling at a 4.2% rate. Fed Fund futures now imply a 66.0% chance for a 75 basis point rate cut next week and a 34% chance for a 100 basis point cut. I continue to believe investor inflation fears are peaking right about now and that gauges of inflation will show meaningful deceleration in the second-half of the year.

US consumer confidence fell less than economists expected in March, Bloomberg reported. The Expectations component fell to 61.4 from 62.4 the prior month. The Current Conditions component, a gauge of Americans’ perceptions of their own present financial situation, actually rose to 84.6 from 83.8 the prior month. The spread between the two remains historically wide as the future is always perceived as bleak in the current “US negativity bubble.” According to Intrade.com, the odds the US slips into recession this year have declined to 68.8% from a high of 77.5% in January. I still think gauges of consumer confidence are bottoming for the year right about now and will turn higher next quarter.