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Summary of My Post-CPI Tweets

Following is a summary of my post-CPI tweets. You can follow me @inflation_guy!

  • Well, I hate to say I told you so, but…increase in core CPI biggest since Aug 2011. +0.3%, y/y up to 2.0% from 1.8%.
  • Let the economist ***-covering begin.
  • Core services +2.7%, core goods still -0.2%. In other words, plenty of room for core to continue to rise as core goods mean-reverts.
  • (RT from Bloomberg Markets): Consumer Price Inflation By Category http://read.bi/U60bLJ   pic.twitter.com/R2ufMjVRRM
  • Major groups accel: Food/Bev, Housing, Apparel, Transp, Med Care, Other (87.1%) Decel: Recreation (5.8%) Unch: Educ/Comm (7.1%)
  • w/i housing, OER only ticked up slightly, same with primary rents. But lodging away from home soared.
  • y/y core was 1.956% to 3 decimals, so it only just barely rounded higher. m/m was 0.258%, also just rounding up.
  • OER at 2.64% y/y is lagging behind my model again. Should be at 3% by year-end.
  • Fully 70% of lower-level categories in the CPI accelerated last month. That’s actually UP from April’s very broad acceleration.
  • That acceleration breadth is one of the things that told you this month we wouldn’t retrace. This looks more like an inflation process.
  • 63% of categories are seeing price increases more than 2%. Half are rising faster than 2.5%.
  • Back of the envelope says Median CPI ought to accelerate again from 2.2%. But the Cleveland Fed doesn’t do it the same way I do.
  • All 5 major subcomponents of Medical Care accelerated. Drugs 2.7% from 1.7%, equip -0.6% from -1.4%, prof svs 1.9% from 1.5%>>>
  • >>>Hospital & related svcs 5.8% from 5.5%, and Health insurance to -0.1% from -0.2%. Of course this is expected base effects.
  • Always funny that Educ & Communication are together as they have nothing in common. Educ 3.4% from 3.3%; Comm -0.24% from -0.18%.

This was potentially a watershed CPI report. There are several things that will tend to reduce the sense of alarm in official (and unofficial) circles, however. The overall level of core CPI, only just reaching 2%, will mean that this report generates less alarm than if the same report had happened with core at 2.5% or 3%. But that’s a mistake, since core CPI is only as low as 2% because of one-off effects – the same one-off effects I have been talking about for a year, and which virtually guaranteed that core CPI would rise this year toward Median CPI. Median CPI is at 2.2% (for April; it will likely be at least 2.3% y/y from this month but the report isn’t out until mid-day-ish). I continue to think that core and median CPI are making a run at 3% this calendar year.

The fact that OER and Primary Rents didn’t accelerate, combined with the fact that the housing market appears to be softening, will also reduce policymaker palpitations. But this too is wrong – although housing activity is softening, housing prices are only softening at the margin so far. Central bankers will make the error, as they so often do, of thinking about the microeconomic fact that diminishing demand should lower market-clearing prices. That is only true, sadly, if the value of the pricing unit is not changing. Relative prices in housing can ebb, but as long as there is too much money, housing prices will continue to rise. Remember, the spike in housing prices began with a huge overhang of supply…something else that the simple microeconomic model says shouldn’t happen!

Policymakers will be pleased that inflation expectations remain “contained,” meaning that breakevens and inflation swaps are not rising rapidly (although they are up somewhat today, as one would expect). Even this, though, is somewhat of an illusion. Inflation swaps and breakevens measure headline inflation expectations, but under the surface expectations for core inflation are rising. The chart below shows a time-series of 1-year (black) and 5-year (green) expectations for core inflation, extracted from inflation markets. Year-ahead core CPI expectations have risen from 1.7% to 2.2% in just the last two and a half months, while 5-year core inflation expectations are back to 2.4% (and will be above it today). This is not panic territory, and in any event I don’t believe inflation expectations really anchor inflation, but it is moving in the “wrong” direction.


But the biggest red flag in all of this is not the size of the increase, and not even the fact that the monthly acceleration has increased for three months in a row while economists keep looking for mean-reversion (which we are getting, but they just have the wrong mean). The biggest red flag is the diffusion of inflation accelerations across big swaths of products and services. Always before there have been a few categories leading the way. When those categories were very large, like Housing, it helped to forecast inflation – well, it helped some of us – but it wasn’t as alarming. Inflation is a process by which the general price level increases, though, and that means that in an inflationary episode we should see most prices rising, and we should see those increases accelerating across many categories. That is exactly what we are seeing now.

In my mind, this is the worst inflation report in years, largely because there aren’t just one or two things to pin it on. Many prices are going up.

  1. June 17, 2014 at 10:30 am

    Really great post Mike, as usual.

    I have a pretty good handle on local (San Diego) housing prices so thought I’d share my local observations in case that gives some color. Prices went nuts last year; at this time last year they were up almost 25% yoy! Things really flattened out after that, though. As of May, we were still up 10% yoy, but most of that increase happened in the first few months of the yoy period. Since Aug 2013, for instance, single family home prices here are only up 2-3%.

    On a m2m basis, prices have risen this spring due to the usual seasonal boost (which offset some mild declines from late last year). However, it seems like that may have flattened out over the past month.

    That said the supply vs. demand situation is still fairly healthy in terms of supporting price increases, but definitely trending in the wrong (for rising prices) direction, as higher prices discourage buyers and bring new inventory to market.

    Of course, you’ve documented that there is a lag between rising home prices and rising rents, so this may not be relevant to the CPI for a a while.

    • June 17, 2014 at 11:12 am

      Thanks, Rich. I think in the hotter markets, what you see there is definitely happening. In some of the previously-cooler markets (e.g. my neighborhood!), some heat is coming on but nowhere near what it was in the hot markets. In any event 10-20% isn’t sustainable, but if it quiets down to only 5% that’s still far too fast historically…unless inflation rises to the 4% range. And yes, you’re right by the way – given the long lags, the flattening out of rents is still quite a ways away (and closer to 4% than 3%).

      Now, one of the issues with modeling the property-to-rent translation is that it PROBABLY should be done in real terms, that is, instead of saying for example “OER should level out at 4%” I should say “OER should level out at 1% over core CPI,” but then the whole thing gets very messy because all of the good data comes from a period when core inflation was pretty close to a fixed number so it ACTED like a fixed number. In other words, if core inflation picks up I am not sure that my model implies that rents should level off at some point, or simply track higher than core and continue to pull it higher.

  2. June 17, 2014 at 4:47 pm

    In my market, Charlotte, apartment construction is booming. Large-scale projects, including many mid- and high-rises. A lawyer told me there are favorable federal rules for apartment lending, and banks are diving in. At any rate, these new apartments will carry higher monthly rates, and will probably result in lower-priced, older units standing empty. There is no way the Charlotte market can absorb all these new apartments.

    There is almost no new construction of condos. All of these apartment projects are in locations that would have been perfect for condos, but we’re getting apartments instead.

    So it looks like an artificial stimulus – some sort of tax advantage for apartments – is causing a boom in construction, beyond reason in my opinion. I assume this same scenario is playing out across the US. How is this sort of aberration likely to be reflected in the US inflation rate?

    • June 17, 2014 at 5:05 pm

      Well, if the high-priced new apartments are crowding out the low-priced old apartments, that will show up as inflation…I don’t believe there is any quality adjustment for rental housing like there is for owned-housing.

  1. June 17, 2014 at 10:08 am
  2. June 18, 2014 at 11:59 am
  3. June 18, 2014 at 7:25 pm

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