The Consumer Price Index and the University of Michigan Consumer Sentiment Index show no signs of inflationary pressure

On Friday, the Bureau of Labor Statistics released its Consumer Price Index (CPI) for March.  The March CPI increase declined to 0.3 percent, after February’s 0.4 percent increase.   This result was in line with economists’ expectations. The “core measure”, which excludes food and energy costs, rose by 0.2 percent.  The most significant aspect of the March CPI is that the “headline number” suggests declining inflationary pressure.  Nevertheless, a close review of the report exposes price increases in a number of areas.

From the report:

The indexes for food, energy, and all items less food and energy all increased in March. The gasoline index continued to rise, more than offsetting a decline in the household energy index and leading to a 0.9 percent increase in the energy index. The food index rose 0.2 percent as the index for meats, poultry, fish, and eggs increased notably.

The index for all items less food and energy rose 0.2 percent in March after increasing 0.1 percent in February. Most of the major components increased in March, with the indexes for shelter and used cars and trucks accounting for about half the total increase for all items less food and energy. The indexes for medical care, apparel, recreation, new vehicles, and airline fares increased as well, while the indexes for tobacco and household furnishings and operations were among the few to decline in March.

The all items index has risen 2.7 percent over the last 12 months, a decline from last month’s 2.9 percent figure. The energy index has risen 4.6 percent and the food index has increased 3.3 percent; both increases are smaller than last month. In contrast, the 12-month change in the index for all items less food and energy, which was 2.2 percent last month, edged up to 2.3 percent in March.

The Thomson Reuters/University of Michigan’s Consumer Sentiment Index for April dropped to 75.7 from 76.2 in March. Economists’ expectations were for no change from the previous figure of 76.2.  One aspect of this report – which was consistent with the Consumer Price Index report – concerned the subject of inflation.  The Thomson Reuters/University of Michigan’s one-year inflation expectations reading fell to 3.4%, from 3.9% in late March.  This suggests that consumers are sensing a decline of inflationary pressures.

The major ETFs expected to respond to the Consumer Price Index and the Thomson Reuters/University of Michigan’s Consumer Sentiment Index are:

Consumer Discretionary Select Sector SPDR Fund ETF (NYSEARCA:XLY) +0.06%

Consumer Staples Select Sector SPDR Fund ETF (NYSEARCA:XLP) +0.46%

SPDR S&P Retail ETF (NYSEARCA:XRT) -0.79%

Technology Select Sector SPDR Fund ETF (NYSEARCA:XLK) -1.18%

Vanguard REIT ETF (NYSEARCA:VNQ) -0.12%

Bottom line:  The stock market continued its decline after release of both the Consumer Price Index and the Thompson Reuters/University of Michigan Consumer Sentiment Index, since abating concerns about inflation are not enough to override concern about China’s economic slowdown.

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About John Nyaradi (http://www.wallstreetsectorselector.com) John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.