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 or Enduring Intellectual Properties. 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 or get it a little cheaper on our site here.

• 15 minutes to go to CPI. Consensus on core is for 0.17% or so. But due to tough year-ago comparison, y/y should drop to 1.6%
• Hurricane effects may boost headline a bit, though most of that will be later. Shouldn’t see core effects yet.
• Core effects may potentially be seen (eventually) in shelter and vehicles; both were destroyed in large amounts in Harvey/Irma
• well well well. Core +0.249%, ALMOST 0.3% rounded. y/y to 1.69%
• Turnabout is fair play. Highest core CPI in 8 months, and haven’t seen hurricane effect yet.

• Note the easy comparisons from year ago for the next couple of months, too. Might just have seen the lows in core.
• housing up, medical care down again. Drilling down now…
• core services was up to 2.5% from 2.4%…core goods down to -0.9% from -0.6%! With dollar weakening that’s going to change.
• Housing 2.91% from 2.83% y/y. Primary rents 3.88% from 3.81%; OER 3.27% vs 3.21%.
• Lodging Away from Home +0.23% vs -2.36% y/y. That was one of those one-offs. Poof.
• Motor vehicles -1.57% vs -1.72%. No hurricane effect yet but as I said on Bloomberg today…that’s likely to be a big + going forward
• 81% vs 2.58% last month on Medical Care as a whole. Medicinal Drugs: 2.51% v 3.84%. Hospitals 4.09% v 5.31%. Insurance 0.17% v 1.24%
• Professional services (medical) unch at just +0.2% y/y.
• Figure out whether this medical care pricing collapse is temporary or real and you have the big story.
• medicinal drugs:

• Housing and medical care. I think the Medical Care move is mostly a composition change, catching more self-pay from insurance-pay.

• Does this change anything for the Fed? Not with the hurricanes. Expect movement to reduce balance sheet, while holding rates down.
• Enough for today. Will put up my summary article later. If you want the chartbook go to https://store.enduringip.com
• [later:] Median CPI was 0.247%, y/y at 2.15% up from 2.13%, basically stable since June between 2.13% and 2.18%.

This was a shorter string of tweets than I usually produce. Part of the reason for that was that I was in a car careening down the highway returning from my appearance on Bloomberg TV to talk about the Phillips curve and auto inflation, and partly it was because this one was pretty easy.

Lodging Away from Home jumped. But it had previously plunged inexplicably, so this is just a reversal. I didn’t tweet about that one, but it is symptomatic – there are a number of one-offs, and some of them are going to reverse.

Rents rose a bit, but again that is partly just a retracement of the recent slide. As I pointed out last month, that slide merely put rents back on the model where they had been running ahead of the model, so this isn’t terribly surprising.

The really surprising part was and is the Medical Care part. All subcomponents of that index are now decelerating, although pharmaceuticals are doing so in a slightly less-dramatic fashion than medical professional services. This is very outside of anyone’s forecast ranges. It is possible this is just payback for the rises the previous year, but if that’s the case then it’s not going to continue. Is it possible that we suddenly have reined in the price of medical care by making it hard to acquire? I suppose that’s possible, but I would think the better bet is that the composition of services is changing as people are paying for more out of pocket – so we buy the band-aid rather than the tourniquet, and that looks like lower prices. It is, however, really hard to tell at this point and that’s the main remaining conundrum.

I said up top that the important hurricane effects, notably in Motor Vehicles but also in Shelter, have not been felt yet. (Read more about these upcoming effects in my column “Some Effects on Inflation from Harvey and Irma”). Moreover, the next few months will see core CPI comparisons of 0.12%, 0.15%, and 0.18% from last year. Accordingly, I think core which is currently at 1.69% will be at 1.77% next month, 1.82% the following month, and 1.84% the month after that. Importantly, none of that is enough to scare the Fed into hiking again, and with the hurricane damage I think they’ll eschew further rate hikes for a while. However, they will probably start reducing the balance sheet, and if they can manage to sustain that – reverse QE, but holding policy rates down – then they will have lucked into the “right” policy that could keep inflation’s peak in the 3%-4% range rather than the 5%+ trajectory that many of their other paths have. I am skeptical they will stay the course, because reverse QE will have bad effects on asset prices. But it’s a start.