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Summary of My Post-CPI Tweets

Here is a summary of my tweets after the CPI release this morning. You can follow me @inflation_guy.

  • CPI +0.1%/+0.1% core, y/y core to 1.8%. Core only slightly weaker than expected as it rounded down to 0.1% rather than up to 0.2%.
  • Housing CPI was weak, second month in a row. Rents will eventually catch up w/ housing prices…but not yet.
  • Apparel CPI was weak after a couple of strong up months. I’ll have the whole breakdown in a bit.
  • Core was actually only 0.13%, suggesting last August’s 0.06% and this August’s number might merely be bad seasonals.
  • Market was only looking for 0.17% or so, so it’s not a HUGE miss. Still disappointing to my forecasts as upturn in rents remains overdue.
  • Core CPI now 1.766% y/y. More difficult comparison next month although still <0.2%.
  • Accelerating major grps: Apparel, Medical Care, Educ/Comm, Other (20.9%); decel: Food/Bev, Housing(!), Transp (73.1%), unch: Recreation
  • Housing deceleration actually isn’t worrisome. Primary rents were 3.0% y/y vs 2.8% last. OER was 2.23% vs 2.19% last.
  • Housing subcomponent drag was from lodging away from home, household energy, other minor pieces. So housing inflation story still intact.
  • Core services inflation unch at 2.4% y/y; core goods inflation up to 0% from -0.2%. Source of uptick: mean reversion in core goods.
  • So OER still reaches a new cycle high at 2.23%…it’s just not accelerating yet as fast as I expect it to. Lags are hard!

The initial reading of this number, as the tweet timeline above shows, was negative. The figure was weaker-than-expected, and Housing CPI decelerated from 2.26% to 2.17%. This seemed to be a painful blow to my thesis, which is that rising home prices will pass through into housing inflation (expressed in rents) and push core inflation much higher than economists currently expect.

Housing CPI is one of eight major subgroups of CPI, the other seven being Food and Beverages, Medical Care, Transportation, Apparel, Recreation, Education and Communication, and Other. Housing receives the most weight, at 41% of the consumption basket and an even heavier weight in core inflation. So, a deceleration in Housing makes it very hard for core inflation to increase, and vice-versa. If you can get the direction of Housing CPI right, then you’ll have a leg up in your medium-term inflation forecast (although it isn’t very helpful in terms of projecting month-to-month numbers, which are mostly noise). Thus, the deceleration in Housing seemed discouraging.

But on closer inspection, the main portions of Housing CPI are doing about what I expected them to do. Primary Rents (aka “Rent of primary residence”) is now above 3%, in sharp contrast to the expectations of those economists and observers who thought that active investor interest in buying vacant homes would drive up the price of housing but drive down the price of rents. Though I never thought that was likely…the substitution effect is very strong…it was a plausible enough story that it was worth considering and watching out for. But in the event, primary rents are clearly rising, and accelerating, and Owners’ Equivalent Rent is also rising although less-obviously accelerating (see Chart, source BLS).

oerprimarySo, it is much less clear upon further review that this is a terribly encouraging CPI figure. It is running behind my expectations for the pace of the acceleration, but it is clearly meeting my expectations for what should be driving inflation higher. As I say above, econometric lags are hard – they are tendencies only, and in this case the lags have been slightly longer, or the acceleration somewhat muted, from what would typically have been expected from the behavior of home prices. Some of that may be from the “investors producing too many rental units” effect, or it might simply be chance. In any event, the ultimate picture hasn’t changed. Core inflation will continue to rise for some time, and will be well above 2% and probably 3% before the Fed’s actions have any meaningful effect on slowing the increase.

  1. HP Bunker
    September 18, 2013 at 3:15 pm

    Hi Mike, I have what should be a fairly straightforward TIPS question: How should one interpret the metric “SEC yield” as it relates to TIPS (given that the nominal value of principal at maturity is uncertain)?

    • September 18, 2013 at 6:55 pm

      Hmmm, might not be a straightforward question. What is “SEC yield?”

  2. eric
    September 18, 2013 at 7:20 pm

    SEC yield is the rate of interest paid on the securities held by a fund over the last 30 days minus fees…anualized. The SEC has no official guidance on TIPS. So, some tips funds include the CPI increase in the “sec yield” and some dont.

  3. HP Bunker
    September 18, 2013 at 7:26 pm

    Also known as “yield to maturity”. The metric is used for TIPS funds/etfs, but it’s not clear what it means in that context. Presumably, nominal yield to maturity for TIPS cannot be calculated years in advance. Here, for example:


    The SEC yield for the etf STIP is given as 2.45%, which seems far too high for a “real” yield to maturity, or even a nominal one (given that this is a short term, 0-5 year maturity TIPS etf). I was just wondering if you knew how yield to maturity is generally estimated for TIPS (if at all; but it seems strange that the information is presented to investors by financial websites if it is meaningless).

    • September 18, 2013 at 8:07 pm

      Oh, sure. I actually run into this problem when I report performance for a model we run. We are asked for the portfolio yield. I used to give the real yield, which is the only CORRECT answer. But then they had trouble when I gave a negative yield, and in any event people who would be searching the database and screening on yield would improperly exclude us (or improperly include nominal yields that were higher). So I started adding the trailing 1 year CPI, but that’s totally misleading. The RIGHT thing to do is for the data provider to collect the real interest rate and report it, or report the nominal interest rate for a nominal bond portfolio, and let the client decide which is more attractive.

      It’s just one more way that institutions continue to resist the fact that TIPS and other inflation-indexed instruments improve the range of choices for investors. Or, perhaps it’s incompetence. In either event, the answer to your question is that I haven’t the faintest idea what it means, and I doubt the people distributing that data do, either! 🙂

  4. eric
    September 18, 2013 at 7:44 pm

    basically, if its a pure TIPS fund, you want to look at the duration, the fees, and the premium/discount if its a CEF. That should tell you what you want to know.

    • September 18, 2013 at 8:08 pm

      Well, you’d want to know the real yield too, of course. A 12 duration and a -1% real yield is a bad fund; a 2 duration and a -1% real yield isn’t a bad fund at all! But you shouldn’t care about a nominal yield at all.

  5. eric
    September 18, 2013 at 9:08 pm

    Yeah, I was assuming two funds made up of US TIPS at the same time with the same duration and the same expenses would automatically have very similar real yields.

    • September 18, 2013 at 9:21 pm

      Depends on the shape of the curve, but these days since all the TIPS funds hug the indices (no one barbells a portfolio etc) that’s true. But I suppose the bigger point is that as you said there is no standard on how those yields are presented, so you’re right…better to ignore it and focus on duration and fees.

  6. HP Bunker
    September 19, 2013 at 1:34 pm

    Thanks for the replies. I bought some STIP (the etf) yesterday; hence the questions. The quoted SEC yield of 2.45% sounds great, but has got to be a worthless number (for an 0-5 year TIPS index with a duration of 3). Even for a nominal yield, it seems too high. Anyway, it’s an unexciting investment, but when the central bank “jumps the shark”, some inflation protection seems warranted…

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