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.

• Been a while since I did a live CPI dive here. Thanks to all of those who voted with their dollars over the last year and supported my private CPI tweets. It wasn’t enough to make a commitment to it, so I’m back to occasionally doing it free on this channel. Hope it helps.
• I do it anyway for myself and Enduring Investments, so it’s not THAT big a deal to put it here if I happen to be in the mood. Anyway, hope you get some value. If so, think about whether I or Enduring can help your investment processes. Now for the walk-up.
• Consensus calls for about 0.18% on core CPI today, with the y/y rising to 2.2%. The bouncy PPI helps the mood although the PPI itself doesn’t have much forecasting power for CPI.
• in PPI there were clear freight and other upstream pressures though. We haven’t really seen much of this in CPI – no real trade/tariff effect yet e.g. Apparel is where I’d expect to see than and in core goods generally. But they’re still slightly in deflation.
• I think there’s some upward risk to used cars and trucks, but there was a big jump last month so we could get a retracement of that before another move higher next month, or continue the ‘catch up’ to private surveys this month. Hard to tell on a month-to-month basis.
• Lodging Away from Home took a dip last month and might be upside risk today. Medical Care is due to start rising again too. So in a minute, we will see!
• Slightly stronger core than expected…0.21% when they were looking for 0.18%. But pretty close.

• 21% on NSA core y/y.
• Let’s see. Core goods went up to 0.0% y/y from -0.1%, so that’s moving in the expected direction. Another big month from Used Cars and Trucks, +2.37% m/m after +2.62% last month. y/y now up to 2.30%. It was negative just a few months ago.

• Lodging Away from Home rose from -2.42% y/y to -1.38% y/y, as we got a small positive this month after a big negative last month. I’m still skeptical that hotel prices are in deflation but someone will yell “AIRBNB” loud enough like that’s an argument, so I’ll leave it there.
• Hefty lift in Primary Rents. +0.36% m/m, bringing y/y to 3.61% from 3.57%. That’s news because lots of pundits have been decrying the end of the housing market and therefore housing inflation. These aren’t necessarily the same thing.
• Apparel actually took another large fall m/m. This continues to make little sense in a tariffy world.

• Some of that is dollar strength, sure. But I’m still surprised.
• Medical was +0.37% m/m after -0.07%, so that came through as I expected/hoped. Y/y rose to 2.03% vs 1.71%. Both Pharma and Doctor’s Services rose nearly 0.5% m/m after declines last month. Interesting that despite this, and housing, core services were unch at 2.9% y/y.
• Core inflation, ex-shelter rose to 1.53%, almost at the 2016 highs (1.61%). The disinflationary impulses are deep in the rear-view mirror now.

• The Apparel breakdown is always so weird. Y/Y, “Boys’ apparel” is +11.9% while “Girls’ apparel” is -0.7%. Hokay.
• Brace yourself for a big jump in Median. Looks like the median category is a housing subindex so my estimate won’t necessarily be accurate but it won’t be LOWER than 0.28% m/m and my best guess is 0.33% m/m pushing y/y median CPI to 2.83%. Won’t know for a few hours yet.
• 83% if it happened would be basically back to the highs. So the question is, what’s keep Core Services from a bigger bounce if housing and medical care are both looking strong?
• Motor Vehicle Insurance? This is 2.4% of CPI.

• Health insurance rising again…we knew this was true on the wholesale level but seems to be coming thru retail as well. But CPI measures health insurance inflation in an odd way, too much to get into here.

• Oh no. Are you kidding me? Wireless telephone services -3% y/y down from -0.5%y/y last month. *smh* Here we go again?

• Currently triumph of hope over experience in stocks. This figure clearly puts the Fed squarely still in tightening mode. And I don’t expect any major easing of inflationary pressures soon.
• Kind of a good reminder of how out over their skis the inflation shorts are here. With Median at 2.7% or 2.8% after today, here’s the core cpi curve from inflation swaps (calculated by Enduring Investments). X-axis is years. Tremendous confidence that the Fed will win.

• Now, to be sure the hurdles for y/y core get higher over the next few months, with Dec ’17 at +0.24% m/m and Jan ’18 at +0.35% (remember that??), so core will probably not reach new highs until Q2. But there’s nothing here to give confidence that inflation is about to fall.
• Let’s do the four pieces. For new followers, these four pieces are each roughly a quarter (0.2%-0.3%) of CPI. The first and most volatile is Food & Energy. We don’t spend a lot of time on this. No forecasting power.

• Piece 2 is core goods, the smallest of these 4 pieces but the main thing that has kept inflation sedated over last half decade. Now out of deflation even with a strong dollar. Sustainable? In a de-coupling world, maybe.

• Core services, less rent of shelter. long downtrend still in place. This includes stuff like medical care, but also wireless services. Which really ought to have its own category I’m starting to think!

• Steadiest piece is Rent of Shelter. This is just coming back to model. No real upstream signs that this is about to roll over – it was just ahead of itself. Latest point is actually an up-wiggle.

• One more chart. The weight of the distribution of y/y changes. You can see the big bars for housing but the long tail. The bar at left is mostly food, energy, tech, and apparel at the moment. Without those categories, CPI is around 2.8%, right around median.

No real reason to wrap this one up – the numbers speak for themselves. Despite the weakness in energy, which is killing the inflation markets (since energy is most of the volatility in headline inflation, to which TIPS and inflation swaps are tied), prices in general continue to rise and if anything seem to be gaining a little steam even outside of housing. Housing inflation isn’t likely to move very far in either direction for a while from the current level, so the next movement in core or median CPI is going to come from core-ex-shelter categories like Medical Care (possibly looking up), Apparel (quite heavy), and other core goods like autos.

But there’s no reason whatsoever in these numbers to indicate to the Federal Reserve that it’s time to stop raising rates. To the extent that they begin to chirp about a pause, it’s because they want stock prices to go up (or, I guess, more accurately they just don’t want to be blamed for the bear market). Yes, growth is slowing but no formulation of the Taylor Rule is going to give a lot of cover to a decision to ease off of rate hikes when the policy rate is below the current rate of inflation.