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

This month, I am making sure to include my comments before the actual number, since my suspicions about the upside risk were exquisitely wrong. This is why you shouldn’t put a lot of weight on monthly figures, folks!

• Step right up ladies and gents. The CPI circus is about to commence.
• Last month’s circus crazier than usual, including an unprecedented (and inexplicable) 11+% drop in wireless telecom services. [Editor’s note: it was only 7%. I corrected this in a later tweet]
• This caused more diversion in core and median CPI. Median (better measure) remains steady at 2.5%.

• PPI y’day was broadly strong. I don’t pay much attention to PPI but it does create upside risk.
• Also note that European inflation saw a drop and then big jump from the early Easter. Not sure we have an analog but…
• Point is that consensus is for 0.17% or so. There’s a lot of upside risk to that number I think.
• Over next few months, core will rise regardless as we drop off 0.18, 0.21, 0.15, and 0.13. Easy hurdles.
• Wow! Core only 0.1% again! Even a low 0.1%…0.07%.
• I cannot WAIT to get a look at the breakdown.
• ..Medical Care ebbed from 3.5% y/y to 3.0% y/y, wanna look inside that one. Recreation and yes, communication also soft.
• Core drops to 1.89% y/y. Lowest since late 2015. Of course, remember that median is a better measure – we’ll see that later.
• [I retweeted this, look at Matthew’s yellow line here]

• Wireless telecom services fell another 1.7%. Incidentally I earlier said 11% m/m was last mo…it was only 7% m/m, the 11% decline was y/y.
• so wireless telecom services now down 12.9% y/y, 9.9% over the last 3 months. This really warrants explanation from BLS.
• In Medical Care, Medical Drugs fell to 2.62% from 3.97% y/y. Professional svcs, which is twice the weight, fell to 1.58% from 2.50%.
• Health insurance fell to 2.72% vs 3.34%. Lowest since 2015.
• Medical decel seems implausible but remember is a rate of change measure. So rising from high level, but at slower rate, is lower CPI.
• Let’s get to housing. Primary rents 3.84% vs 3.88%. OER fell to 3.39% from 3.49%, that’s a big drop for 25% of the index.
• So overall, Housing rose from 3.1% to 3.2%, but that’s on the strength of a 1% rise in household energy y/y.
• This is OER. The decline is actually welcome – it had been running well ahead of even our optimistic models.

• Core goods steady at -0.6% y/y. So the deceleration in last two months is all from core services, from 3.1% to 2.9% to 2.7%.
• I don’t see that slowdown in core services as sustainable unless housing rolls over…
• …and I don’t see that happening while home prices keep rising at 6-7% as they have been.
• Weakness in services outside of housing s/b taken with grain of salt though…a lot of that is wireless services!
• But doing core-less-housing-and-wireless is cheating. We take out housing to look @ the wiggly stuff. Can’t also take out wiggly stuff.
• OK, four-pieces CPI look. From most-wiggly to least. They tell the story. Food & Energy:

• Core goods (about 19% of CPI)

• Core services less rent-of-shelter (26% of CPI). <<BOOM>>

• And Rent of Shelter (33.3%)

• And within core services less ROS, a lot of that is wireless but medical care ebbing is also in there. That’s the story of this month.
• On Median…I have 0.13% m/m, but the median category is an OER piece and the BLS seasonally adjusts those.
• But my best guess on median is 0.13%, dropping y/y to 2.4%.
• Maybe I’m wrong and inflation pressures are ebbing after all. You know who else is thinking that? Janet Yellen.
• Forgot to tweet this chart earlier.

• Also interesting. Core<median b/c of big weight in left tail. But also starting to be more weight in general left of mode.

• Last routine chart: the weight of categories inflating faster than 3% is still almost half. It’s that left tail draggin’ stuff down.

• OK, done until my summary. But this is fun. Just saw this Fednotes citing some research of MINE for a change: https://www.federalreserve.gov/econresdata/notes/feds-notes/2016/inflation-perceptions-and-inflation-expectations-20161205.html

It was easy to ignore last month’s negative core print. It was obviously tied to a ridiculous (and still not explained by the BLS) plummet in the price of wireless telecommunications services. A 7% fall, nationwide, in one month, that no one seems to have noticed, is something the BLS really needs to comment on (my best guess is that some data plans got uncapped, and the BLS assumed a large increase in the data taken at zero dollars and therefore a big drop in the price per gig. That’s effectively a hedonic adjustment, and a not unreasonable one if you really saw a dramatic increase in data being taken. Since I have yet to talk to anyone who saw anything that resembled this huge effect, I remain skeptical.) But in any event, it was easy to ignore March’s number released in April.

Now we have two months in a row, and while wireless telecom contributed this month as well, there was also softness in medical care and in owner’s equivalent rent. That’s harder to ignore. And while median CPI was steady after last month’s debacle, it should downtick today.

I don’t think inflation is done rising; I think this is just a pause. But as I said above, I am sure that the decline in core CPI and core PCE will not go unremarked at the next FOMC meeting – the one where they are supposed to hike rates again. I think we’ll learn a lot about the stomach the Fed has for continuing the rate normalization regime by whether they go through with the next hike.