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 (updated sites coming soon). 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.

• Another CPI day dawns bright and cold. But will inflation get heated up again, with a fourth 0.3% print on core, out of five? Or stay cold like last month’s +0.13% on core?
• Last month, core goods was pressured a little bit, although still +0.7% y/y, by softness in Used Car prices and a big drop in pharma prices.
• Apparel also fell as the new methodology is adding more volatility to that series than we had previously seen.
• I suspect we will see more softness from Used Cars (maybe not as much as last month), as sales surveys have been consistently soggy recently.
• I also continue to wait for the other shoe to drop with Medical Care. The Health Insurance part, which is a residual, has been running really hot. But that probably just signals that survey prices of the other parts need to catch up with reality. At least that’s my speculation.
• Although core CPI was soft last month, Median was +0.25% and a new cycle high of 2.97% y/y. So the underlying pressures are steady and that probably means we aren’t about to see a major turn lower yet.
• Really, the major change since last month has been the Fed’s tone – Powell saying that the Fed won’t even consider addressing higher inflation until they see “a really significant move up in inflation that’s persistent.”
• That changes the calculation for investors and we have seen a meaningful move higher in breakevens recently as a result.
• Consensus for today’s number is +0.3% headline, +0.2% on core, with the y/y core staying at 2.4%. And they’re really calling for an 0.2% or above, not a ‘soft’, rounded-up, core figure.
• We are rolling off 0.196% from last October, so to have the y/y rise we need another pan-0.2% print. And to keep y/y at 2.4% on core it can’t be much softer than that.
• That’s all for now. Except for this: after the figure I will be on @TDANetwork with @OJRenick. About 9:15ET is when we are scheduled to go to air. Tune in! And good luck today.
• Soft one, +0.16% on core that rounds up to +0.2%. The y/y core dripped from 2.36% to 2.32%, which caused the rounded figure to go 2.4% to 2.3%.
• So, what happened in June-July-August? Three months is a lot for an outlier.

• OK, wow, -3.84% m/m drop in Lodging Away from Home. Looks like a seasonal distortion as the prior month was +2.09%. LAfH is only 1% of consumption, but that means it’s ~4bps of the m/m figure.
• Used Cars and Trucks rebounded to 1.32% m/m, but the y/y dropped to 1.44% from 2.61%. It may have a little further to drop but that’s not surprising.
• Apparel -1.8% m/m, so again more volatility from the new methodology. Core goods y/y dropped from +0.7% to +0.3%, but some part of that was Apparel going from -0.3% y/y to -2.3% y/y.
• In the big pieces, Primary rents were +0.14%, a little soft (y/y to 3.74% from 3.83%) and Owner’s Equivalent +0.19%, also soft, to 3.32% from 3.40% y/y. Along with Lodging Away from Home it meant the Housing subindex, 42% of CPI, decelerated to 2.89% from 3.03%.
• That’s potentially big on a couple of fronts, if it indicates actual slowing in rent inflation. As a big piece of CPI, a modest slowing there will help turn Median too.
• Belated but here’s the chart on used cars and trucks. You can see the y/y is back in line, but some more softness likely.

• So, core inflation ex-housing actually rose to 1.60% from 1.55%. Pretty minor move but it hasn’t been higher since Feb 2016, with the exception of two months ago when it hit 1.70%.

• So the spread of shelter inflation over core, non-shelter inflation, has been extreme and one question has been whether housing inflation would slow or other inflation would rise. Answer this month is: both.

• Not to belabor Lodging Away from Home but here is the y/y. The monthly volatility is not helpful, but at least it’s only 0.9% of CPI.

• Weirdly, I haven’t mentioned Medical Care. M/M, Medicinal Drugs rose 1.05% after declining -0.79% last month. Y/y rose to +1% from -0.3%. Doctors’ Services rose to 1.16% y/y from +0.93%. But Hospital Services jumped to 3.46% from 2.08% y/y.
• Hospital Services is 2.2% of consumption, and that +1.38% m/m jump is the reason that Core Services rose to 3% y/y from 2.9% DESPITE the deceleration in housing.
• y/y hospital services. So is that part of what wasn’t being captured and thus showing up in the health insurance residual? Maybe, but Health Insurance still went to +20.1% y/y from 18.8%. Even knowing that’s a residual doesn’t keep it from being scary.

• It’s measuring a REAL COST INCREASE, it’s just not really in the price of insurance policies that Americans are paying. Yes, they’re rising, but not at 20% y/y.
• Insurance chart

• Early guess on Median is that it will be a softish +0.19%, which will keep y/y basically unch.
• Biggest annualized declines this month were Lodging Away from Home, Women/Girls’ Apparel, Infants’/Toddlers’ Apparel, and Men’s/Boys Apparel. Biggest increases: Car/Truck Rental, Motor Fuel, Misc Personal Goods, Energy Services, Used Cars/Trucks, Med Care Commodities.
• Those are biggest annualized MONTHLY declines, Sorry.
• About to get ready to air on @TDANetwork, so four-pieces charts might have to wait until later.
• Summary today is that as usual there are lots of moving pieces but the interesting bit is the big housing pieces. They’re slow but there’s some anecdotal signs of softness developing and if that’s real, it could cap core inflation for now. Not sure of that yet.
• I still think inflation is likely to peak for this cycle in early 2020, but again I admonish that the downside won’t be nearly as low as we have seen downsides and the next upside will be worse than this one. Higher highs and higher lows from here.

I still owe you the four-pieces charts, so here they are. First, Food & Energy.

Next, Core Goods. It suffered a big setback today but it still looks generally uptrending. I don’t think this is about to go to 4, but something between 0.5% and 1.0% for a while is not hard to imagine especially if pharma prices stabilize.

Core services, ex rent-of-shelter. Now, this starts to look a little more interesting? Medical Care showing some perkiness and as the second-most-stable piece here, core services less rent of shelter is worth monitoring for the longer-term macro inflation picture.

Finally, Rent of Shelter. Still in the same general vicinity, but there are starting to be some anecdotal reports of softness in home prices in certain areas so it’s worth monitoring. It’s not about to plunge as in 2007-09, but it just needs to back off a little to change how concerned we are about inflation.

That said, inflation seems to be broadening a bit and also becoming more volatile. The volatility is partly because the BLS is changing the way they do certain things but it’s also a consequence of fractious trade relationships where firms are changing their sourcing, prices are responding to tariffs and tariff threats, etc. To the average consumer who encodes price increases as inflation and price decreases as good shopping, volatility in prices feels very much like inflation so if this continues then inflation expectations could rise just on the volatility (unless it’s all measurement volatility, of course).

I do think that the investment implication of today’s inflation numbers is muted compared to the implication of what the Fed has said about the inflation numbers. To wit, the Fed won’t even consider hiking to restrain inflation unless they see “a really significant move up in inflation that’s persistent.” So far we haven’t seen that, and in fact recently the upper tails have been coming down just as the fast as the lower tails have been going up. The chart below shows what proportion of the CPI is inflating faster than 4% y/y.

But from an investor’s standpoint and more importantly from an advisor’s standpoint, the Fed stance changes how you approach a portfolio if you are a professional-risk-minimizer (as most advisors are). In the old days, an uptick in inflation that caught an advisor flat-footed might be forgiven because we assumed the Fed was working hard in our direction – to keep inflation low. But now, even if you don’t think inflation is going to rise, the professional risk on the downside is bigger because clients will say to the advisor “why didn’t we have any inflation hedges? The Fed told you they wanted expectations to go higher!” Maybe this is too subtle, but breakevens are up 20-25bps over the last few weeks and I think no small part of that is because investors and advisors are now on their own with respect to inflation. In my experience, people who think they might be shot at can usually be trusted to dig their own foxholes.