CPI UP SLIGHTLY IN THE PAST YEAR
NO USEFUL INFORMATION IN RETAIL SALES REPORT
REAL EARNINGS ARE DOWN

I guess it doesn't matter how many reports come out that show that inflation and economic activity are moderating. All we need are one or two news releases, where the month-to-month change in some indicator is a little higher than the "experts" have forecast, to throw the bond and stock markets into another selling panic.

The Bureau of Labor Statistics reported today that the seasonally adjusted Consumer Price Index for All Urban Consumers (CPI) rose by 0.3 percent during July, higher than the 0.1 rise predicted by the "experts". The core CPI for July, obtained by excluding the contributions from the volatile food and energy sectors, also rose by 0.3 percent.

For the twelve-month period ending in July, the CPI rose by 3.0 percent. This compares with a rate for 1995 of 2.5 percent. But, as we all know, 1995 was a all-around slow year. To put this in perspective, let's look at the growth in the CPI in recent years:

              YR   1988   1989   1990   1991   1992   1993   1994   1995
CPI RISE (%)        4.4  4.6    6.1    3.1     2.9   2.7    2.7     2.5 

As the table shows, the 3.0 percent July year-over-year change in the CPI is well below the annual changes in the 1988-90 period, and is in the same ballpark with the modest readings from 1991 through 1994.

While the change in the CPI over the past 12 months is a bit higher than the change in 1995, it is not out of line with the modest annual changes logged in recent years. What's more, of late, the preponderance of economic news has indicated that the economy is slowing from its second quarter surge and that there are no other signs of acceleration in prices or wages. In light of all this, today's market reaction was totally inappropriate.

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In another report today, the Census Bureau announced that its advance estimate of U.S. retail sales for July showed an increase of 0.1 percent (+/-1.4%) from June. The "experts" had forecast a drop of -0.2 percent. And, in a way, they were correct. The uncertainty in the month-to-month change accomodated readings ranging all the way from -1.3 percent to + 1.5 percent. In other words, the month-to-month changes as reported by the Bureau and estimated by the "experts" were rendered totally meaningless by the sampling inaccuracies inherent in making the advance estimate. This report provided no basis for market decision making.

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In a third report, the Bureau of Labor Statistics, announced that real average weekly earnings fell by 1.5 percent from June to July. This went a long way toward offsetting the 2.2 percent increase in June. The decrease in July was due in part to a 1.2 percent decrease in average weekly hours and a 0.2 decrease in average hourly earnings (the first decrease in 12 months) -- more signs of a slowdown in the third quarter.

In the twelve-month period ending in July, average hourly earnings increased by 3.1 percent, average weekly hours decreased by 0.6 percent, and the CPI rose by 3.0 percent. So, on an inflation-adjusted basis, earnings decreased by 0.5 percent in the past year.

Summing up: Today, one report showed that, on an annualized basis, consumer price inflation was little changed from the modest level it has been at for the past 5 1/2 years; a second report showed that it was impossible to draw any conclusions from the June-to-July change in retail sales; and a third report showed that, in the past year, workers' wages were not even keeping up with the modest rate of inflation. Was that what caused the 30-year T-bond to lose 1 6/32 and the Dow Jones Industrial Average to drop by 57.70? No. . . but, that's what really happened in today's economic news.