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.

I usually post these the day of CPI but I was traveling and didn’t get to do so. These were my tweets in the immediate aftermath of the CPI report.

• About 15 minutes to CPI. Today’s stream-of-consciousness will be a little more relaxed since I’m at a conference in Florida at the moment!
• As for the number today, here are some thoughts.
• We’ve recently begun to see some reduction in pressure from truckload rates upstream. Not down, but rising more slowly. Bottlenecks in overland are easing somewhat. Higher prices are still passing through but less alarm about it.
• Housing price increases have also been slowing. Again, we’re talking second-derivative stuff; they aren’t falling nationwide. Rents are loosely related to prices, so I don’t think we’ll see much downward pressure there yet, but it’s a meme at the moment.
• Wage growth remains strong, but wages lag inflation so that’s not much illumination.
• There is decent momentum in some other categories, and…tariffs. Remember we don’t need tariffs to get worse growth/inflation outcomes than the last 20 years; we just need less forward progress on trade. And we have that for sure! (Again with the second derivatives??)
• I’ve been expecting an interim peak in median CPI later in 2019. It’s not here yet, and I might still be wrong about that and see it climb further. Inflation after all is a process with momentum. But that’s my current expectation.
• However, I ALSO don’t expect that when median CPI eventually turns lower that it will fall anywhere close to the prior lows. I think we’ve begun a long-term cycle of higher highs and higher lows in inflation.
• Now, money growth is picking up again, and higher rates over the last year imply higher velocity going forward. But globally we have more negative-rate debt, so that’s dampening. But the macro pressures on inflation remain to the positive side.
• For today, the Street sees 0.2% on core, dropping y/y to 2.1% because drop off a difficult +0.3% comp from last January. The January figure sees a number of interesting cross currents. I suspect there’s a smidge of upside risk to this number, but I have low confidence on that.
• We will see, in 5 minutes.
• ok, 0.24% on core CPI, a bit higher than expected and BARELY kept core from rounding lower to 2.1%, even dropping off the strong Jan 2018

• 15% is core to 2 decimal places y/y.
• Primary rents 0.31% m/m after 0.21%, but y/y still declined to 3.43% vs 3.47%. As I said, rents only loosely related to prices and rent slowing has still been only at the margin.
• Owners’ Equiv Rent was 0.27% vs 0.22% last, with y/y unchanged at 3.21%. So the big chunk of housing was reasonably strong. Actually Lodging Away from Home, which had a very large jump last month, had another decent rise this month. It’s only 0.9% of CPI but no “AirBnB” effect.
• So the macro interesting thing is that core services declined to 2.8% y/y, thanks to the gradually slowing housing I think, while core goods rose to 0.3%.
• That’s the highest core goods since 2013. Our models think this is headed up to 0.5% before flattening, but … tariffs. Our models don’t include them. This is the underlying pressure.

• OK, so Apparel is 0.11% y/y, basically unchanged. Jump this month, but that looks seasonal. Medical care declined to 1.90% y/y vs 2.01%. Recreation rose to 1.36% vs 1.14%.
• There was some chatter that a change the BLS made in how it accounts for quality change in some communications categories could drag down the CPI like cell phones did last year, but it’s a much smaller effect. Education/Communication was 0.31% y/y vs 0.21% last month.
• Sorry for the interlude…some tech glitch. Anyway…picking up. Education was 2.72% y/y vs 2.62% last month; Communication was -1.68% vs -1.76%. So the rise in Education/Communication was from both parts.
• Not so in Medical Care. Medical Care Commodities were -0.28% vs -0.50%; Med Care Services 2.45% vs 2.64%. So the overall small decline in Medical Care (1.90% vs 2.01% y/y) was basically entirely from the “Hospital and Related Services” category (2.44% vs 3.64%).
• The other Medical Care categories – medicinal drugs, Professional Services, and Health Insurance – all rose. But they were counterbalanced by the Hospital part.
• Median this month might be really interesting. Rough calculation suggests that a housing sub-category that Cleveland Fed calculates might be the median category so it’s hard to tell. But I think Median y/y will drop from 2.77% to 2.64%. Might even be worse.
• Core ex-housing fell to 1.39% from 1.51%. So, there’s definitely some signs of softness here even though Core Goods is providing upward pressure. Working on the 4-pieces breakdown now.
• Core ex housing chart. Sorry not too many charts today. Little harder to do remotely.

• OK the four pieces. For those new to this analysis, I break CPI into these four pieces, each roughly 1/4 of CPI (19%-33%).

• Here are the four pieces, from most-volatile to least-volatile. Part 1 is Food and Energy. Clearly holding down headline CPI but this is why we look through it. Look at that y axis!

• Part 2 is Core Goods. With the trade frictions, this is presently the most interesting piece. Even if the tariffs implemented by the Administration are dropped, we’ve still stopped the forward trade momentum of the last quarter century. So this bears watching.

• Core Services less Rent of Shelter. A lot of this is Medical Care, and while it looked like we might be breaking the long downtrend recently…maybe not so much.

• Finally, rent of shelter. Off the highs, but our models don’t have it dropping seriously. Housing prices still rising, albeit more slowly. And rents, while high relative to wages, are now getting a following wind from rising wages. I suspect this will meander.

• OK, that’s all for now and more than I expected from Florida. Stop by my blog at http://mikeashton.wordpress.com , or our company site at http://www.enduringinvestments.com . Have a nice day.

It seems, from reading the other post-mortems, that some people saw this as a very strong number. It really wasn’t…slightly stronger than expected. But I guess it depends on your state of mind coming in. I’ve thought the underlying run rate of core CPI was something like 0.22% per month, and with seasonal issues in January thought we’d be a touch higher than consensus. I suppose if you thought inflation was falling off a cliff you might have expected something much weaker. The composition, too, was solid but unspectacular. Again, if you thought rents were about to collapse then you were surprised that it was only down a little on a y/y basis. The core goods rise is important, but again – not unexpected.

So is inflation running “hot”? Well, if you think 2.2% is hot, I suppose so. But Median CPI also declined on a y/y basis, as have wages recently. Don’t get me wrong, I think inflation is still rising and probably will for most of this year. But it’s not shooting higher and if I were at the Fed and if I believed what they believed, I wouldn’t be alarmed by this number (I am not at the Fed and I don’t believe what they believe, for the record).