E-piphany

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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.

• CPI day! People looking past CPI at 8:30 but…not me!
• Last 2 CPI prints were very low. The first was a 1-off wireless telecom debacle, read about that effect here.
• Last month’s CPI weakness was in core services – in medical care & rent of shelter. Harder to ignore but unlikely to be in freefall.
• Consensus core CPI is for another weak print, only 0.16% or so. Economists believe disinflation is upon us. I think that’s premature.
• Last May’s core CPI was 0.21%, so that’s the hurdle to get acceleration in y/y figures.
• WOW! At this rate I will have to change my Twitter handle. Each month is more shocking. m/m core 0.1%, not sure on the rounding yet.
• 06% m/m on core CPI, so again incredibly weak. y/y at 1.74%, producing the scary optic of a drop from 1.9% to 1.7% on the rounded core
• This is an amazing chart.

• waiting for the data dump, but housing, medical care, apparel subcomponents all decelerated.
• So the upshot is…core prices overall are unchanged from February. That’s right, 0% core inflation over 3 months.
• Yes, it was telecom that made 0% possible and that won’t be repeated. But still striking. Here is the index itself.

• So Dec, Jan, Feb core inflation is rising at a 3% annualized pace. next 3 months, zero. That’s not supposed to happen to core.
• Breakdown now. In Housing, Primary rents remain solid at 3.85% y/y, unch. But Owners’ Equiv plunged (for it) to 3.25% from 3.39%.
• Picture of OER: this is a dramatic shift in this index, and frankly hard to explain given home price increases.

• Medical Care decelerated to 2.66% from 2.95%. But w/in MC, drugs rose to 3.34% vs 2.62%. Professional svcs flopped to 1.00% from 1.58%
• CPI/Med Care/Professional Services, y/y. Doctors suddenly don’t need to be paid.

• Apparel had been at 0.45% y/y, fell to -0.94%.
• The Fed funds rate is too low and almost certainly rises today. But with a sudden zig in CPI…it wouldn’t SHOCK me if they delayed.
• Back to housing – we’ve believed OER was ahead of itself for awhile. Adjustment is just really sudden.

• in the biggest-pieces breakdown, core goods is at -0.8% y/y while core services is down to 2.6%.
• US$’s recent decline (2y change in trade-weighted $ is only +7%) means core goods are losing the downward pressure of last few yrs.
• But the dollar’s effect is lagged significantly. We’re still seeing effect of prior strength.

• Here are the four pieces of CPI, most volatile to least. Starting with Food & Energy (21% of CPI)

• Core goods (33%)

• Core services less Rent of Shelter. Yipe!

• Got my percentages wrong. Food & Energy is 21%. Core goods is 19%, core services less ROS is 27%. Rent of Shelter is 33%.
• Rent of Shelter. 27% of overall CPI. I still find it hard to believe this is going to collapse, but as I tweeted earlier it was ahead.

• My early estimate of Median CPI is 0.18% m/m, 2.28% y/y down from 2.37%.
• One thing to keep in mind is that in June and July we drop off 0.15% and 0.13% from y/y core. So core should bounce back some. (??)
• I mean, we can’t average 0% core going forward, right?!? Otherwise @TheStalwart and @adsteel will never have me on again.
• core ex-shelter down to 0.59% y/y. Lowest since JANUARY 2004!

• Interestingly, the weight of categories inflating more than 3% remains high. The pullback is in the far left tail.

Well, it’s getting harder to put lipstick on this pig. The telecom-induced drop of a couple of months ago was clearly a one-off. But the slowdown in owners’-equivalent rents is merely putting it back in line with our model, and so it’s hard to believe that’s going to be reversed. And I’m really, really skeptical that there has been an abrupt collapse in the rate of increase of doctors’ wages.

Except, what if there is a shift happening from higher-priced doctors to lower-priced doctors? This sort of compositional shift happens all the time in the data and it’s devilishly hard to tease out – for example, in the Existing Home Sales report it is sometimes difficult to tell if a change in home prices is coming from a broad change in home prices, or because more high-priced or low-priced homes are being sold this month, skewing the average. So this kind of composition shift is possible, in which case each individual doctor could see his wages increasing while the average declines due to the composition effect. I have no idea if this is what is happening – I’m just making the point that if it is, then this effect could be more persistent and not the one-off that the telecom change was. However, I am skeptical.

I do not believe that we have seen a turn in the inflation cycle. With money growth persistently above 6%, it would take a further collapse in money velocity from already-record-low levels to get that to happen. Forget about the micro question, about whether movements in this index or that index look like they’re rolling over. The macro question is that it is hard to get disinflation if there’s too much money sloshing around, whether or not the economy is growing.

But that being said, the Fed doesn’t necessarily believe that. There is a tendency to believe one’s own fable, and the fable the FOMC tells itself is that raising interest rates causes growth to slow and inflation to decline. Although the effect is spurious, we are currently seeing somewhat slower growth (for example, in the recent slowing of payrolls) and we are seeing lower core inflation. It is a low hurdle for the Fed to believe that their policy moves are an important part of the cause of these effects. Of course, they’re not – the tiny changes the FOMC has made in the overnight rate, even if it had been propagated to significant changes in longer rates – which it hasn’t been – or resulted in slower month growth – it hasn’t, especially if you look globally – would not have had much effect at all. But that won’t stop them from thinking so. Ergo, the chance that the Fed skips today’s meeting, while small, are non-zero. And there is a much greater chance that the “dot plot” shifts lower as dovish members of the Fed (and that’s most of them) back away from the feeble pace of increases they’d been anticipating.