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.

• Okay, about 10 minutes to CPI showtime so let’s review last month.
• We have had a couple of soft prints (<0.2% before rounding, one all the way to 0.1%, on core), but those followed 3 months of 0.3% monthly core prints. This month, consensus is for a soft 0.2% on core, something around 0.18%.
• last month, we saw weak core goods, a lot of that being vehicles and NOT surprising but general softness outside of vehicles mildly surprising.
• the bigger surprise was in housing, where Lodging Away from Home was very soft and both Primary and Owners’ Equivalent Rents were soft. That was the main story from last month.
• But of course we are also watching Medical Care carefully. The prior rise in Medical Insurance inflation, because of the way the BLS measures, might (or might not) be a proxy for as-yet-unsurveyed strength in other medical subcomponents.
• Those other medical care subcomponents HAVE been seeing some recent strength. So Core-Services-ex-Rents is something we are very interested in.
• Two other points. The first is that November had a very late Thanksgiving, so depending on when retailers adjusted prices for the retail season (generally lowering them) and when the survey mostly happened, there could be some seasonal volatility.
• If they did not lower their prices as early in the month, because Black Friday was later, that COULD mean we see strength that’s not seasonally expected. Don’t know but something to keep in mind. Built-in caveat for today.
• Second point is: the Fed doesn’t care. Powell says they’re not going to tighten unless inflation goes significantly higher and stays there a long time. So, you’re on your own!
• That’s all – grab a coffee and see you in 3 min.
• 2% on core, but stronger than expected…really 0.23% before rounding. Y/Y core stays at 2.32%
• Here are the last 12 core prints. Funny how one print can make the whole chart look more ominous.

• OK, first housing. Lodging Away from Home was +1.1% m/m after -3.84% last month, so as-expected bounce. Primary Rents were +0.26% vs 0.14% last mo and OER was +0.24% vs +0.18%. So softness was not repeated in housing.
• That said, the y/y figures in housing still declined, with Primary going to 3.66% vs 3.74% and OER 3.26% vs 3.31% prior. So those are big effects holding down y/y core. But core was unchanged y/y. So where were the gains?
• I should say those are the effects holding down further acceleration in core. Drippy housing means th other parts need to pick up the slack.
• Some of that is Medical Care. This month overall Medical Care CPI was +0.32% m/m, 4.24% y/y. That’s with soft Pharma CPI, -0.16% m/m and a scant 0.58% y/y.
• You can see Pharma is still rising, this is y/y.

• Doctors’ Services and Hospital Services also softer this month than last, but not huge.
• Core Goods overall slumped to +0.1% y/y from 0.8% just a few months ago. This month, the weakness in pharma helped but the y/y for Used Cars also fell to -0.44% from +1.43% previously. Expected some weakness, but that might be a bit overdone.
• Here is core commodities vs lagged import prices. Not super surprising that it is slowing.

• Core inflation ex-shelter basically unchanged, at 1.61% vs 1.60%.
• Unfortunately having some computer “issues” that is preventing my usual deeper dive in some of these categories.
• Oh, Apparel -2.29% y/y vs -0.34%. Again, the BLS’s new survey methodology is introducing IMO a lot of extra volatility in this series.
• Well, found the computer issue but it’s really that the BLS posted the subcomponents a little later than usual today. Won’t be fixed in the next few minutes and I have to go meet clients in Minneapolis. So I’ll wrap it up, a little short this month – sorry.
• I think the bottom line is that there isn’t anything super surprising here. The softness we had seen in housing took at least a temporary hiatus. Overall core was stronger than expected, but hard to be sure that’s meaningful.
• As I said up top, there’s no real reason to think that the Fed cares…so from a markets perspective, TODAY and this month, these numbers don’t mean much. Except for you, because the Fed isn’t going to try and restrain inflation so you better make sure you’re prepared.

Late post of today’s summary, since I had customer meetings during the day. Up above, I sort of flippantly commented about how the chart of monthly changes looks totally different when you add the latest point. I’m always fascinated about examples like this. Clearly, we didn’t add 12 monthly points, but only one today. So there is no more information in that chart than we had new today – what happens is that we change the context a little bit. Prior to today’s figure, the question was “are the three high numbers the aberration, or are the last two points an aberration from a higher trend?” The latest point makes it seem more likely that the two low ones are the aberration, but I’d be cautious about reading too much into that. First, there’s a ton of noise in any economic series. Second, I mentioned in my walk-up to the number in the bullet points above that there’s some chance the late Thanksgiving could result in a higher-than-expected CPI if retailers lowered their prices for the Christmas season later than normal. And third, there wasn’t anything super-alarming about this data.

By the same token, “nothing super-alarming” could also be read as “no big outliers, just a generally faster pace of inflation.” So if you’re bullish on inflation, you might read the composition that way. Moreover, it should be pointed out that while the consensus forecast was for +0.2% on core CPI, and we got +0.2%, there was actually a pretty decent miss: the consensus was more like +0.18% before rounding up, and core CPI was +0.23% before rounding down. Economists were further off than they appear to be if you just look at the rounded figures.

My view continues to be that inflation ought to peak early next year, but that the cyclical low won’t be that low. However, I am becoming a bit less confident that the peak is that near, especially given how Medical Care is behaving. The key point though is the last one I raised today. The Fed has changed the rules of the game…or I guess a better analogy is that it has changed which team it is playing for in a very vocal way. It is one thing for the Fed to say “we want inflation higher and are going to push it higher,” which implies a level of control (to be sure, it is control they don’t actually have), but something else entirely to say “we really don’t care if it goes up,” which implies abdication of responsibility for the results. Investors should beware of this. I don’t think it is the small thing it sounds like.