E-piphany

Below is a summary of my post-CPI tweets. You can follow me @inflation_guy, or see the twitter scroll on the right side of the page here :

• CPI +0.2%/+0.2%, above expectations.
• Core actually 0.204%, almost a full tenth above the implicit rounding in the forecasts. y/y at 1.66%, rounding up to 1.7%.
• Perfect, just after the Fed starts publicly fretting about deflation. Those guys are funny.
• Core services up to 2.3%; core goods still at -0.3% although that’s up from last month. If that number ever mean-reverts (and it will).
• Accel major groups: Food/Bev, Housing, Apparel, Transp (76%). Decel: Med Care (8%). Unch: Rec, Educ/Commun/Other
• Med Care inflation decelerated to 2.17% from 2.26%, so not a big drop. But Housing rose to 2.8% from 2.45%!
• In housing: OER 2.61% from 2.51%, Primary rents 2.88% from 2.82% (all what we have been saying). Lodging away from home 3.3% from 1.8%.
• Core ex-housing 0.9% from 0.8% – still very low. The rise in core will be driven by housing, but the rest will come along.
• Our OER model had 2.62% as the y/y forecast this month; actual was 2.61%. Model says we’ll be at 3.1% on OER at least by year-end.
• Median CPI won’t be out for a while but there’s a decent chance it ticks back up to 2.1%, based on my back-of-the-envelope.

It is worth pointing out that it was not particularly difficult to forecast that housing inflation would accelerate, and continue to accelerate, for a while. The chart below (source: Enduring Investments) is something I’ve been running for more than a year.

A simple blend of just these three components suggests a 3.3% rise in Owners’ Equivalent Rent by the end of the year (our more-detailed model has it at 3.1%, so consider that the forecast range), with primary rents a few tenths above that. If all of the other core components inflate at just 1.2%, overall core would be above 2%.

The other components of core include Medical Care, which has been held down by unusual factors for the last year but has recently been rising again. It includes Apparel, which is only rising at 0.5%. It includes airfares, which have been declining at a 4% rate over the last year, and automobiles, which are unchanged over the last year. In short, there is a lot of upside in the non-housing core elements.