E-piphany

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments.

• Core CPI +0.18%, y/y rises to 1.77%. Pretty much as-expected on the headline figures.
• Was some market concern about a possible higher print following PPI, but there isn’t much correlation.
• Note that the next two months of CPI will ‘drop off’ an 0.10% and an 0.05%, so we should get to 2% on core inflation by mid-September.
• Of course the Fed’s target is ~2.25% on core CPI (since they tgt core PCE) so Fed can argue it’s still below tgt. Uptrend may concern.
• Housing inflation on the other hand going to the moon
• This is great chart and it’s the reason core never had a chance of entering deflation territory. & will go up. (retweeted Matthew B)

• Housing #CPI overall just hit 2% y/y. Primary rents 3.53%. OER, which is 24% of the whole CPI, rose to 2.95% from 2.79%. Wow!
• …our model for OER is at 3.1%, and the actual number HAD been lagging. I love it when a plan comes together.
• So housing drove core services to +2.5% y/y, core goods -0.4%.
• So if housing busted higher, what was the services offset? Medical care, 2.51% y/y vs 2.84% last month.
• WSJ argued earlier this month that is expected because under Ocare people are actually spending their own money.
• Within medical care, drugs went to 3.44% vs 4.05%, pro svcs went 1.83% from 1.58%, and hospital & related to 3.48% from 4.51%. So maybe?
• Yes, core PCE & core CPI are going to be rising. But core PCE won’t be anywhere close to the Fed’s tgt by Sep.
• Here is core and median CPI (the latter not out yet today) and core PCE.

• core commodities are about where they should (eventually) be, given rally in TW$. A bit ahead of schedule though.

• This chart means either that home prices are overextended or incomes need to catch up, or both.

• Here is our OER model that is based on incomes. Not a tight fit but gets direction right.

• I wondered about this when I paid $180/night for room in S. Dak. Hotel infl driven in part by fracking boom?

• probably would fit better if I used a regional lodging index rather than national, I suspect.

The summary of today’s CPI release is that the underlying pressures remain the same, and the trends remain the same. The really interesting dynamic going forward isn’t in CPI (although at some point when core goods starts to rise again, that will be quite interested), but in how the Fed reacts to the CPI. When they meet in September, core CPI will be around 2%, a bit shy of where the Fed’s target is. But the uptrend will be clearly apparent, and core and median CPI will likely be closer to 2.5% than 2% by the end of the year.

So the interesting dynamic is this: even though inflation is below the Fed’s target, and growth isn’t great shakes, and there are risks to the global economic system in Europe and in China…will the Fed tighten in September anyway? If they do, then it will be surprising if only because the FOMC passed on many opportunities over the last five years which would have been much more accommodating (no pun intended) to a normalization of rates. Sure, if they now recognize that they should have tightened three years ago it shouldn’t color their decision today – the best time to plant a tree may have been thirty years ago, but the best time that we can actually choose from is today – but the Fed hasn’t usually been so limber in its reasoning. Especially with a very dovish makeup of the Committee, I would be surprised to see them hike rates unless inflation has surpassed their target and growth is pretty strong with global risks receding.

However, the strength of my view on that has been slipping recently. Although I think most of the Fed’s talk on this point is mere bluster, we do have to pay attention when Fed speakers – and especially the Chairman – say the same things multiple times. While Yellen has expressed only an expectation that the Fed will raise rates later this year (and we have no idea how conditional that expectation is on stronger growth, on Chinese growth, on European volatility etc, she has said this multiple times and at some point I have to conclude she means it. I still think that the odds of getting rates even up to 1% in a single series of moves is slim, but I admit the more-consistent Fed chatter is worth listening to.