Consumer Price Index and Falling Crude Oil Propel Dow to 4 1/2 Year High

By Chris Puplava, February 22, 2006

The Consumer Price Index (CPI) data for January was released today furthering concerns over more rate hikes ahead as the CPI rose 0.7% from December, higher than the 0.5% analyst consensus. However, the CPI less food and energy was 0.2%, in line with the 0.2% analyst consensus.

Released on 02/22/2006 for Jan 2006

CPI, M/M change
Actual	0.7 %
Consensus	0.5 %
Consensus Range	0.3 to 0.6 %

CPI less food & energy, M/M change
Actual	0.2 %
Consensus	0.2 %
Consensus Range	0.1 to 0.4 %

Source: Econoday.com

While reviewing the individual components of the CPI, the increase was largely due to a 5.0% spike in energy prices. This is not surprising as crude oil rose from near $60 a barrel at the beginning of the year to nearly reaching its October high of $70 a barrel. Gasoline prices showed the biggest increase within the overall energy category, up 6.4% with the year-on-year gain at 27.4%. But the Bureau of Labor Statistics said gasoline prices so far in February are lower and are not likely to show an increase in next month�s data release, though still high on a year-on-year basis. Electricity prices also spiked, up 5.5%, which was the largest one-month rise in 54 years of record keeping! This resulted to a large extent from utilities �passing through� higher fuel prices to consumers.

Source: Energystox.com

Since the sharp rise in January, crude has retreated back down to below $60 a barrel with a rally seen last week back to near $61 a barrel. As the sharp spike in crude oil in January lifted energy prices 5.0% relative to December's data, a sharp decline will likely be seen in February's energy data released next month, helping to ease concerns over inflation. On the other hand, the strong increase in energy prices seen last year may be permeating into the economy as many have feared.

Taking a deeper look into the numbers behind the data reveals a broad increase in prices that the Fed will likely take notice. Airfares rose 1.2%, education up 0.7%, new vehicles up 0.6% (biggest rise in 12 months), hotels up 0.5%, food up 0.5% (the biggest rise in nine months), tobacco up 0.4%, drugs up 0.3%, and apparel was up 0.3% (the biggest rise in 5 months). All of these increases contributed to the year-on-year core rate posting a 2.1% rise in January, just above the 2% line that policy makers watch, while the overall year-on-year rate was up an unsettling 4.0%, indicating that energy costs are passing through to the core CPI.

Source: Econoday.com

The CPI data is not encouraging as energy costs indeed appear to be passing through into the core CPI. Although the CPI had fallen for two consecutive months due to falling energy prices post Katrina and Rita, January's CPI reflected the increase in crude over the month which has since corrected. Oil is continuing its decline after a brief rally, falling $1.59 per barrel to close at $61.01. The question remains how much farther oil will fall in the face of recent events in Nigeria, and the release of the Wall Street Journal article on February 9th that reported Mexico's biggest oil field, Cantarell, that may go into decline this year.

Source: Wall Street Journal

The Cantarell oil field represents 60% of Mexico's output, and Mexico's government estimates that annual production would decline from 2.0 million barrels daily in 2005 to between 1.4 and 0.7 million barrels per day in 2008. This is alarming for the United States as we import more oil from Mexico than we do Saudi Arabia. We receive 1.598 million barrels per day from Mexico and 1.495 million per day from Saudi Arabia (source: Energy Information Administration). If Cantarell does go into decline this year, Saudi Arabia will likely replace Mexico as the number two top oil supplier to the US behind Canada.

Other potential caps holding oil up is the unrest in Nigeria (#5 top US oil import supplier) and political tension with Hugo Chavez in Venezuela (#4 top US oil import supplier). Over the weekend Nigerian militant attacks shut in one fifth of crude supply from Nigeria, which is the eighth largest oil exporter. On top of Nigerian militant attacks, Royal Dutch Shell halted 455,000 barrels a day of production over the weekend after nine of its workers were kidnapped.

Moreover, Ecuador has stopped pumping oil after protesters invaded a pumping station late Tuesday, leading the state oil company to halt exports of 144,000 barrels a day.

The continued downward driving force behind crude and natural gas prices has been the weekly petroleum supply data. Gasoline inventories are already at their highest levels in six years and are expected to rise 800,000 barrels, with crude inventories expected to climb 700,000 barrels from last week's levels in the report released tomorrow by the Energy Department.

Source: Econoday.com

With the above geopolitical tensions in Nigeria, Ecuador, Iran, and possible declining production from Mexico playing a tug-of-war with the increasing petroleum inventories, volatility is certain while the direction of crude is not.

Market Summary

The market driving forces for the day were a relatively benign core CPI coming in line with analyst expectations as mentioned above and falling crude-oil prices. Both forces aided the Dow�s climb to a 4 1/2-year high today, up 68.11 points to close at 11,137.17. The S&P 500 was up 9.63 points to close at 1,292.67, while the tech laden NASDAQ also posted a gain of 20.21 points to close at 2,283.17. Gold futures rose $2.00 to close at $555.20 an ounce while the dollar index was up 0.09 to close at 90.64.

Broad-based buying took the indexes higher today, as the only declining sector of twelve was energy, down 1.4% with the Financial sector and Capital goods sector up 1.5% and 1.4% respectively (see table below).

Index Summary

Index	Price	Price Change	Today's % Price Change	Week To Date % Price Change	1 Month % Price Change
Dow Jones Industrial Avg.	11,137.17	68.11	0.6%	0.2%	4.4%
S&P Dep. Receipts	129.28	0.79	0.6%	0.3%	2.6%
Nasdaq Composite Index	2,283.17	20.21	0.9%	0.0%	1.6%
Nasdaq 100 Trust	41.26	0.51	1.3%	0.1%	0.0%
Dow Jones Transportation Avg.	4,449.17	53.95	1.2%	1.0%	7.0%
Dow Jones Utility Avg.	412.47	1.33	0.3%	0.7%	-2.1%
Inter@ctive Internet Index	180.42	1.64	0.9%	-0.3%	0.4%

Sector Summary

Description	Last Price	Price Change	Today's % Price Change	Week To Date % Price Change	1 Month % Price Change
Basic Materials	1,432,809	9,275	0.7%	1.4%	4.9%
Capital Goods	768,122	10,590	1.4%	1.5%	8.1%
Conglomerates	818,868	7,956	1.0%	-0.2%	2.6%
Consumer Cyclical	854,040	4,552	0.5%	0.0%	4.8%
Consumer/Non-Cyclical	1,351,391	12,006	0.9%	0.6%	3.3%
Energy	2,831,007	-40,068	-1.4%	0.0%	-3.6%
Financial	5,465,906	82,217	1.5%	1.7%	5.2%
Healthcare	2,378,829	12,356	0.5%	-0.3%	1.2%
Services	4,635,728	22,542	0.5%	-0.3%	2.9%
Technology	3,231,522	23,735	0.7%	-0.5%	1.7%
Transportation	430,277	3,917	0.9%	0.6%	7.1%
Utilities	952,409	8,710	0.9%	1.9%	2.4%

Industry Gains & Pains

Industry Group	Today's Mkt. Cap.	Today's Mkt. Cap. Chg.	Today's % Price Change	Week to Date % Price Change	1 Month %Price Change
Industry Groups with the Greatest Gain in Mkt. Cap. Today
Insurance (Life)	560,887	9,808	1.8%	1.9%	8.0%
Money Center Banks	1,516,543	23,365	1.6%	1.4%	6.1%
Insurance (Prop. & Casualty)	644,001	8,925	1.4%	1.0%	2.0%
Regional Banks	1,186,314	16,107	1.4%	1.0%	6.6%
Electric Utilities	741,340	8,347	1.1%	2.1%	2.5%
Industry Groups with the Greatest Loss in Mkt. Cap Today
Oil & Gas Operations	627,119	-12,694	-2.0%	-0.3%	-6.3%
Oil Well Services & Equipment	355,538	-7,123	-2.0%	-1.4%	-7.2%
Oil & Gas - Integrated	1,803,324	-20,256	-1.1%	-0.3%	-1.9%
Chemicals - Plastics & Rubber	107,468	-905	-0.8%	-1.1%	4.3%
Retail (Home Improvement)	150,781	-861	-0.6%	-0.9%	3.9%

Have a pleasant weekend,

Chris Puplava

© 2006 Chris Puplava

Contact Information

Christopher M. Puplava
PFS Group
PO Box 503147
San Diego, CA 92150-3147
(888) 486-3939 Toll Free
(858) 487-3939 Tel
(858) 487-3969 Fax
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