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A Summary of My Post-CPI Tweets

Here are my post-CPI tweets from this morning. You can follow me @inflation_guy:

  • CPI #inflation +0.2% core. But here’s the thing: that’s with housing showing unexpected softness. And housing markets are bubbling.
  • Unrounded core inflation 1.698%. That’s the last we’ll see of 1.6% handles for years.
  • Core inflation actually barely rounded up, at +0.155% m/m. But, again, that’s with housing inexplicably weak.
  • Core services 2.4%. Core goods still plodding along at -0.2%, and holding overall core inflation down. That won’t persist.
  • CPI major groups accelerating: Food/bev, Housing, Apparel, Transp, Rec, Educ/Comm (89.5%). Decelerating: Medical and Other (10.5%).
  • …but housing only accelerated b/c household energy. OER was unch at 2.2% and primary rents 2.8% from 2.9%. That’s a quirk.
  • certainly nothing in today’s inflation data to scare the Fed into a faster taper.
  • bonds are breaking lower; although the convexity overhang has been worked off, we never got the expected bounce! Not sure why they’re weak.
  • higher rates->higher velocity->more inflation pressure, ironically. in this case, higher rates won’t affect money supply as offset to that

Of all of the places I expected to see a downside surprise, housing was not it. Of course, econometric lags aren’t the same as destiny, so the fact that the leading series all turned higher at the “right time” to cause a rise in Owners’ Equivalent Rent right about now is helpful information for investing, but not necessarily a timing tool!

At 2.2%, OER is still well above core inflation and primary rents at 2.8% are as well. But core goods continue to drag on the overall core inflation number (and to hold core inflation well below median inflation, which comes out later this morning).

I feel I should nudge lower my forecast for 2013 core inflation again, to a range of 2.4%-2.7% from 2.5%-2.8%. I am doing this for two practical reasons related to housing. One is that every month that passes without the expected acceleration is one less month over which inflation can accelerate to reach my year-end target. The other is that every month that passes without the expected acceleration increases the odds that I’m simply wrong, and something is holding down rents even though home prices are launching higher. I don’t think that’s true, but I want to be cognizant of overconfidence bias! However, at this point my nudging of the forecast is more about the former point: my 2014 forecast range remains 3.0%-3.6% for core.


  1. eric
    August 15, 2013 at 12:00 pm

    Very strange that on a day when the most significant data was CPI, there would be such a huge move in _real_ rates, AND that they would be in the opposite direction of breakevens.

    This is making me ups my odds that I’m wrong that real rates are not going much higher in the medium term. But I just don’t see the fed actually raising policy rates anytime in the next 2 years AT LEAST. And spreads (10year-FF) are already in the top decile, historically. How high can they go?

    Slightly off topic question if you have an opinion. I just noticed there is a CEF, (ticker WIW) whose NAV tracks TIP almost perfectly but which is trading at almost a 15% discount to NAV. Expense ratio is higher, of course, 68bps. But the discount is enticing. If you were inclined to hold some TIP, and you didnt really care so much about getting your principle back in a hurry any time soon, can you think of any reason not to use this fund instead?

    • August 15, 2013 at 12:28 pm

      I don’t really know much about the fund, but the top 10 holdings are all TIPS so I guess the discount is probably mostly structure/liquidity-based…I can’t say I have a strong opinion, though.


  2. HP Bunker
    August 15, 2013 at 6:55 pm

    Mike, Don’t you think it’s possible that rents are being held in check (relatively) due to the simple fact that wage gains are not sufficient to enable renters to pay more? I made this argument in response to one of your posts a few months back, and what we’ve seen since then (rapidly rising home prices, but much more modest increases in rents) provides empirical support. In other words, private equity, etc. has access to lots of cheap funds with which to buy rental properties, and competing investments (bonds, for example) don’t yield much, so they are willing to pay a lot for rental houses that will yield what would in more normal times (with regard to interest rates) be a subpar return on capital. There’s just only so much rent you can squeeze out of households whose real income has been falling for years.

    • August 15, 2013 at 7:04 pm

      Well, so far rents are rising at more than 1% faster than core inflation…which isn’t bad! I hear what you are saying, and I’ll entertain that view if it looks like the lags are seriously wrong this time. But remember, wages ALWAYS lag inflation, so this is always the case – consumers win when inflation is falling, and the lose when inflation is rising. But inflation rises anyway.

      However, I will be open to all theories if we get to the end of this year and housing inflation hasn’t accelerated further!

  1. August 15, 2013 at 8:59 pm
  2. August 21, 2013 at 6:03 pm

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