Friday, June 15, 2007

What a Difference 0.0002% Can Make

Stocks and bonds rises today after a report showing higher than expected inflation, 0.7% monthly increaase versus 0.6% expected. However, because the Fed ignores this number and only looks at the "core rate", and because the core rate came in at 0.1% versus 0.2% expected, Wall Street still rallied.

It should be noted however, that the actual core increase was 0.1498%, meaning that had it just been 0.0002% higher, the number would have been rounded up to 0.2% and the stock- and bond rally would never have taken place.

One curios detail is the low "home owner's equivalent rent" number. "Home owner's equivalent rent" is supposed to be based on actual rents for tenants, but actual rent rose 0.3% but equivalent rent rose just 0.1%. Usually such a discrepancy is due to changes in fuel prices, but fuel prices were more or less unchanged so it is not clear what caused the discrepancy. Because "equivalent rent" is 30% of core CPI, had it increased 0.3% too, then the core rate would have increased more than 0.2%.


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