The Labor Department's Bureau of Labor Statistics reported today that, during February, its Consumer Price Index (CPI) for Urban Consumers had risen by a seasonally-adjusted 0.2 percent. Over the past year the CPI rose by 2.7 percent.

The CPI is an index of the prices we would pay if we bought a "market basket of goods and services" that the Labor Department has determined to be typical purchases for urban consumers. CPI changes provide an indication of inflation at the retail level. Bond market participants pay close attention to changes in the CPI because rising inflation leads to higher interest rates and lower bond prices. Stock market participants keep track of changes in bond yields because, in the past, stocks have generally performed well during periods of falling interest rates.

The next best thing to no inflation is a low and predictable rate of inflation. And that is precisely the situation that prevails. February was the 62nd consecutive month of low, essentially constant, CPI growth. The last period comparable to this was way back in the early 1960's.

In a second report today, the Bureau of Labor Statistics released statistics on real average weekly earnings during February. The report showed that real earnings had risen by 2.1 percent from January to February -- largely attributable to a 2.4 percent increase in hours worked. This followed a decrease in real average weekly earnings during January of 1.8 percent -- largely because of a 1.7 percent decrease in hours due to the bad weather. Taken together, the two months essentially nullify one another. So, we shouldn't draw the conclusion from this data that there was a sudden step-up in output in February.

Neither should we jump to the conclusion that February marked a sudden surge in the cost of labor. Taking a look at average hourly earnings we find that the rate for February was actually slightly lower than the average hourly rate for January.

For the year ending in February, average weekly earnings rose by 2.6 percent. But, when the year-to-year rise in the CPI of 2.7 percent is taken into account, we find that real earnings actually fell by 0.1 percent.

This morning the Federal Reserve scared the heck out of the bond market by announcing that its Index of Industrial Production had risen by 1.2 percent in February. This followed a revised drop of 0.4 percent in January.

The Index of Industrial Production measures the total output of the nation's factories, utilities, mines, and oil and gas wells. It is one of the four components of the Commerce Department's Composite Index of Coincident Economic Indicators.

In today's report, the Fed stated that "part of the gain (in February) reflects a bounceback from the temporary disruptions caused by the blizzard that hit the East coast in early January." The report went on to say that "the recovery of aircraft and parts production after the settlement of a strike at a major manufacturer (Boeing) in mid-December accounted for nearly one-third of the overall growth in total industrial output since the end of last year." So, the February value of the index might have been influenced by unusual circumstances. Last month, writing about the January industrial production number, I suggested that we would just have to see a few more months data to see what was really happening. Apparently that is still the case.

I've said it before, and I'll say it again. One data point doesn't define a trend. You have to look at the data over a longer period, say a year, to get an idea of what's really happening. In the twelve-month period ending in February, the Index of Industrial Production rose 1.6 percent. This compares with an average annual growth rate of 4.9 percent from the end of the 1990-91 recession to February 1995.

Today, along with the production data, the Fed also released its February report on capacity utilization. Capacity utilization measures the percentage of the nation's productive capacity that was employed during the month. Between January and February, capacity utilization increased from 82.1 to 82.9. This was only the second month-to-month uptick in this indicator since it peaked out at 85.1 in January 1995. So, the trend of this parameter is definitely down.

Interestingly, the uptick in capacity utilization during February was accompanied by the large downtick in the unemployment rate for February, reported last Friday. I mentioned before that, historically, capacity utilization and the unemployment rate were inversely related. So, the rise in February capacity utilization serves to reinforce the validity of the February drop in unemployment.

Finally, The preliminary estimate of the University of Michigan's March Consumer Expectations Index became available today. The Index rose a whopping 10 points from 77.8 to 88.8. The last time the Index had a reading this high was in December of 1994. And, the last time the Index had a reading higher than this was in December 1992 when it read 89.5. What's everybody so doggone optimistic about? Maybe some of the respondents to the survey were among those folks who found a job last month.

The Consumer Expectations Index is one of the eleven components of the Commerce Department's Composite Index of Leading Economic Indicators (LEI). If today's preliminary value holds up when the final estimate is made, this indicator will make a significant positive contribution to the number for the March LEI.

Byline: Lafferty (MF Merlin)