Home > CPI > The Good News On Inflation Seems Likely to End

The Good News On Inflation Seems Likely to End

In case you haven’t yet heard, congratulations are due to the EU – the recipient of this year’s Nobel Peace Prize. Hey, don’t laugh; they need the money. And don’t click over to the news, where you may find pictures of riots in various places as the peace and prosperity (which, as we now know, was purchased on credit that can never be repaid) is taken away. That’s an inconvenient truth…which, ironically, won the price in 2007. I think I see a pattern.

Back in the real world, American-style capitalism (such as it is) showed some temporary vigor today with Retail Sales announced stronger than expected (+1.1% ex-autos, with a +0.2% revision, versus +0.7% expected). That’s not a huge beat, but the three-month change of 3.04% is the highest rate since late 2005. To be fair, some of that is a payback from a weak Q2, and the year-on-year number is still well below the pace of 2011 and parts of 2010. Optimists, however, will see a glimmer of hope in this number, even if kick-starting the economy through the channel of retail sales isn’t exactly the “high-quality” growth we would like to see.

Speaking of high-quality growth, the bad news today was that the Empire Manufacturing figure was weaker-than-expected, bouncing only feebly from last month’s figure (which was itself the weakest since early 2009).

The equity market responded to the data (or, more likely, to the notion that last week’s mild selloff makes stocks “cheap”) with a healthy +0.8% rally albeit on weak volume. Commodities were smashed for the second day in a row, somewhat inexplicably since the dollar didn’t strengthen and there wasn’t a lot of economic news out today.

Indeed, Monday was pre-climactic, as Mondays often are but this week in particular. For tomorrow is the monthly CPI report.

Last month, recall, core inflation printed +0.052%, a very weak surprise that pulled the year-on-year figure to 1.9%. It was especially surprising since Housing, the heaviest-weighted index, accelerated. The number was dragged down by Apparel, and the quirky drags from August did not all get reversed.

The consensus Street estimate for September CPI is +0.5% headline, +0.2% core. The consensus for the year/year changes is +1.9% for the headline, and an uptick to +2.0%.

An uptick on core is all but assured, because last September’s change in core was only +0.08%. The year-on-year number will print +2.0% if the month-on-month change is only +0.11% tomorrow. In fact, if the monthly figure for core is +0.21% (the monthly changes for March through June of this year averaged +0.22%), year-on-year core inflation will spring all the way back up to +2.1%. That would, incidentally, really help the Treasury sell the $7bln in 30-year TIPS they have to sell this week.

There is some reason to expect these upticks. As I’ve mentioned, the weak inflation data from a year ago is one reason, but even the nature of the last few months’ changes suggest that we are not likely to be in the midst of a broad slowdown in inflation. Median inflation is as high above core inflation as it has been for several years. Housing appears to be accelerating, not decelerating. And, needless to say, global central banks continue to ease aggressively. M2 has begun to re-accelerate and is back to +7% y/y (+8.2% annualized over the last 13 weeks, which is the highest rate since January).

If core comes in weak again tomorrow, it will create a difficult analytical dilemma. A string of unusually weak numbers at the same point of the year in consecutive years could point to faulty seasonal adjustment. Since other economic data have been having difficulty with seasonal adjustment, we would have to consider that possibility. But the more likely interpretation would be that something about the underlying dynamic of inflation has changed, and price increases are decelerating again. I don’t think this is going to happen, but if it does I will have to address that possibility.

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  1. bixbubba
    October 15, 2012 at 5:43 pm


    “Meanwhile, despite significant growth in the monetary base, the behavior of monetary velocity and cyclical economic pressures don’t suggest near term inflationary pressure – particularly in the U.S. where I expect the exchange value of the dollar to be helped by European strains more than it is hurt by further quantitative easing. I continue to expect substantial inflationary outcomes in the back-half of the decade, but at least at present, I doubt the resolve of investors to adhere to an inflationary investment stance through the course of a likely global economic downturn in the interim. The question isn’t so much whether we’ll observe inflation over time, but rather what the likely returns will be from investing on that thesis in present conditions. For now, those conditions suggest positive but fairly restrained returns relative to the risk involved.”

    • October 15, 2012 at 5:56 pm

      Isn’t he the guy who’s long of long-dated STRIPS out the wazoo? Or is that Hoisington?

  2. bixbubba
    October 15, 2012 at 6:53 pm

    Not sure if you are joking (dont know who hoisington is) Hussman’s “return” fund is basically cash right now. He is in government bonds of average duration about 1.5 years, and he’s trimmed gold and foreign currency down to very low levels.

    Hussman mostly agrees with you, but he’s a bit more bearish on the economy, and so thinks risks are high in the short run for inflation linked assets.

    • October 15, 2012 at 8:17 pm

      Hoisington are some guys in Texas who have done a terrific job riding the bull market in bonds right to the bitter end, and beyond. Except they don’t think they’re beyond. 🙂

      I am also bearish on the economy. I just don’t think that will do anything to inflation. However, inflation linked bonds are crazy overpriced.

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