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Summary of My Post-CPI Tweets

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. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • OK, 8 minutes to CPI. Street forecast is 0.14-0.15%, so a “soft” 0.2% or a “firm” 0.2% on core.
  • y/y core wouldn’t fall with that b/c last August’s core CPI was 0.12%. In fact, a clean 0.2% would cause the y/y to round up to 2.3%.
  • Either way, Fed is at #inflation target based on historical CPI/PCE spread. And arguably above it if you rely (as we do) on median.
  • Quick commercial message: our crowdfunder site for the capital raise for Enduring Investments closes in 2 weeks.
  • Commercial message #2: sign up for my articles at http://mikeashton.wordpress.com! And #3: my book!
  • Fed’s job just got a lot harder, with weaker growth but a messy inflation print. 0.25% on core, y/y rises to 2.30%.
  • And looking forward BTW, for the balance of the year we’re rolling off 0.19, 0.20, 0.18, and 0.15 from last year.
  • …so it wouldn’t be hard to get a 2.4% or even 2.5% out of core by year-end.
  • Housing rose to 2.58% y/y from 2.45%. Medical Care to 4.92% from 3.99%. Yipe. The big stories get bigger.
  • checking the markets…whaddya know?! they don’t like it.
  • starting to drill down now. Core services 3.2% from 3.1%; core goods -0.5% from -0.6%.
  • Core goods should start to gradually rise here because the dollar has remained flat for a while.
  • also worth pointing out, reflecting on presidential race: protectionism is inflationary. Unwinding the globalization dividend=bad.
  • Take apparel. Globalizing production lowered prices for 15 years 1994-2009.


  • Drilling down. Primary rents were 3.78% from 3.77%, no big deal. OER 3.31% from 3.26%, Lodging away from home 3.31% from 1.57%.
  • Lodging away from home was partly to blame for last month’s miss low. Retraced all of that this month.
  • Motor vehicles was a drag, decelerating further to -0.95% from -0.75%.
  • Medical Care: Drugs 4.67% from 3.77%. Professional svcs 3.35% from 2.86%. Hospitals 5.81% from 4.41%. Insurance 9.13% vs 7.78%
  • Insert obvious comment about effect of ACA here.
  • y/y med care highest since spike end of 2007.


  • CPI Medical – professional services highest since 2008.


  • On the good news side, CPI for Tuition declined to 2.53% from 2.67%. So there’s that.
  • Bottom line: can’t put lipstick on a pig and make it pretty. This is an ugly CPI report. It wasn’t one-offs.
  • I STILL think the Fed doesn’t raise rates next week. But this does make it a bit harder at the margin.
  • Core ex-housing was 1.52%. It was higher than that for one month earlier this year (Feb), but otherwise not since 2013.


As I noted, this is an ugly report. The sticky components, the ones that have momentum, continue to push inexorably higher (in the case of housing), or aggressively higher (in the case of medical care). The rise in medical care is especially disturbing. While core was being elevated mainly by shelter, it was easier to dismiss. “Yes, it’s a heavily-weighted component but it’s just one component and home-owners don’t actually pay OER out of pocket.” But medical care accelerating (especially a broad-based rise in medical care inflation), makes the inflation case harder to ignore. It is also really hard to argue – since there is a clearly-identifiable cause, and a strong economic case for why medical care prices are rising faster – that medical care inflation is resulting from some seasonal quirk or one-off (like the sequester, which temporarily pushed medical inflation down).

What makes this even more amazing is that inflation markets are priced for core and headline inflation to compound at 1.5%-1.75% for basically the next decade. That’s simply not going to happen, and the chance of not only a miss but a big miss is nonzero. I continue to be flabbergasted at the low prices of TIPS relative to nominal bonds. Sure, a real return of 0% isn’t exciting…but your nominal  bonds are almost certainly going to do worse over the next decade. I can’t imagine why anyone owns nominal bonds at these levels when inflation-linked bonds are an option.

Now, about the Fed.

This report helps the hawks on the Committee. But there aren’t many of them, and the central power structure at the Federal Reserve and at pretty much every other central bank around the world is very, very dovish. Arguably, the Fed has never been led by a more dovish Chairman. I have long believed that Yellen will need to be dragged kicking and screaming to a rate hike. Recent growth data show what appears to be a downshift in growth in an expansion that is already pretty long in the tooth, so her position is strong…unless she cares about inflation. There is no evidence that Yellen cares very much about inflation. I think the Fed believes inflation is low; if it’s rising, it isn’t going to rise very far because “expectations are anchored,” and if it does rise very far they can easily push it lower later. I think they are wrong on all three counts, but I haven’t recently held a voting position on the Committee. Or, actually, ever. Ergo, a Fed hike in my view remains very unlikely, even with this data.

Looking forward, Core and Median inflation look set to continue to rise. PCE will continue to drag along behind them, but there is no question inflation is rising at this point unless everything except PCE is wrong. In the US, core inflation has not been above 3% for twenty years. That is going to change in 2017. And that is not good news for stocks or bonds.


  1. Dan
    September 16, 2016 at 12:56 pm

    Economic data aside, I seriously doubt that a panel consisting of Keynesian academics would do anything to hurt Hillary’s odds — a rate hike before the election has about a snowball’s chance in hell!

  2. September 16, 2016 at 1:34 pm

    Nice summary, Mike. Quick question about the policy implications regarding the sharp rise in medical inflation: do you think the Fed takes into consideration that inflation in that particular sector is driven more by other factors (ACA, simple econ 101 – increase demand for a product artificially through subsidy while supply remains constant = higher prices. Cf: education and subsidized student loans for that impact), than policy rates? I can think of other good reasons to raise rates (eg, real rates far below the natural rate invites inefficient capital allocation), but not if the primary reason is to subdue a set of prices that are largely immune to monetary policy.

    • September 16, 2016 at 2:29 pm

      I honestly don’t think this Fed thinks very much or cares very much about inflation. I think they fundamentally believe there ain’t none and ain’t gonna get none, so there’s classic attribution bias: price increases are one-offs and price decreases are “deflationary tendencies.”

      Now, if the Fed was consistent it would observe that the slowdown in PCE relative to CPI had a lot to do with medical care, so if they don’t care in one direction they shouldn’t care in the other direction. But I seriously have seen little introspection either at the Fed or in the economics profession as a whole about what is actually happening to the price picture. (Go search the AEA abstracts to see if you can find any papers with “inflation” in the title!)

  3. Alastair Blyth
    September 16, 2016 at 3:40 pm

    TIPS being what they are, I suppose breakevens will stick at the current delusional levels until the first lemming makes a move – then it’ll be a one-way move higher to 200bps on 10y breakevens. Do you have any ideas on what might trigger it ? I’ve been thinking that it might happen when the Jan16 low in oil (or rather, gasoline) drops out of the 12 month window, causing headline to converge up to core (I seem to remember that the carry seasonals start to help at that point too). I’m starting to wonder whether the healthcare numbers might be enough to get things rolling first though, especially given their outsized impact on PCE inflation. Do you see any signs that the healthcare numbers are a bit stretched here ?

    • September 16, 2016 at 4:13 pm

      I don’t see any signs that they are, but I’m not sure what those signs would be anyway!

      Retail investors always notice inflation when gasoline gets above $3/gallon. My guess would be that’s about when traders will start to notice as well, but the internals are ugly enough that (especially because of the medical care issue) you’re right it might start earlier. I certainly wouldn’t try to time it – it’s not like breakevens are so expensive that timing it badly would hurt horribly. Or at least, not as bad as missing it on the way up in an illiquid market!

  4. Michael Thorson
    October 3, 2016 at 4:23 pm

    Thanks for the response to my comment earlier, Mike. Just curious where increases in health care insurance premiums would materialize in CPI or PCE? Ours continue to increase 8-10% per annum. Yikes.

    • October 3, 2016 at 6:51 pm

      They will show up in CPI…sort of. The BLS recognizes that when you buy an insurance policy you get (a) medical care paid for and (b) a tail-risk hedge. They separate this, and measure changes in the cost of care actually delivered; any increment that is unexplained – that is insurance “profit”, sort of – shows up as a residual that is only about 1% of the CPI basket. That 1% is inflating at 9.13% per year right now (one year ago, it was 1% and it has been 2.68% for the last 3 years compounded)), but it is a small part because the services and equipment and pharmaceuticals that insurance reimburses you for is actually measured at the point of service.

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