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, issuers and risk managers with interests in this area be sure to stop by Enduring Investments!

• Welcome to #CPI Day! And to my monthly yammering on the figure.
• Once again, economists are looking for a soft number today. There is a very strong confidence in the economics community (and in some among the punditry) that the disinflation/deflation wave is JUST ABOUT HERE! So every month they expect it to arrive. So far, not.
• There is as yet no evidence for such a thing as deflation in the data. Outside of housing, in fact, inflation seems to be broadening.
• For a discussion of housing, see my post from october 23 here: https://inflationguy.blog/2020/10/23/the-outlook-for-housing-inflation-from-here-oct-2020/ For a discussion of some of the evidence of broadening, my article here: https://inflationguy.blog/2020/10/27/are-the-inflation-kernels-starting-to-pop/
• So the “consensus” forecasts this month are for 0.1% on core, and 1.7% y/y. Actually Bloomberg says consensus is 0.2% on core, but that’s not consistent with a consensus of 1.7% on core.
• Bottom line is that getting core to drop to 1.6% is going to be hard because in October 2019, core only rose 0.115%. And Core CPI last month almost rounded to 1.8%. So you need a really weak number, almost flat in fact, to get rounding down to 1.6% y/y on core.
• (Bloomberg has 42 respondents to the m/m number and 67 respondents to the y/y number…which is why their figures on the consensus for the m/m number and the y/y number are inconsistent).
• A rise to 1.8% on core CPI is much more likely…a mere 0.15% m/m would do it. As a reminder, the last 4 core CPI figures were +0.24%, +0.62%, +0.39%, and +0.19%.
• On the granularity of today’s number: another huge 0.4%-0.6% surprise seems unlikely. We’ve gotten most of the upside catch-up to Used Cars vs the private surveys…so that could go either way and is not a slam-dunk add as it has been. Other covid categories remain subdued.
• The big question in recent months, and really the only DOWNWARD pressure in major categories, has been in rents. Last month, OER rose only 0.06%, and primary rents only 0.12%.
• That doesn’t look like it’s asking rents, which are plummeting in the cities and rising outside of the cities. Landlords might be saying they expect to collect less rent going forward, which would pressure rents lower…
• …but actual rents being paid are on par with where they were a year ago https://nmhc.org/research-insight/nmhc-rent-payment-tracker/ so eventually reality should catch up with that concern.
• Mortgage delinquencies, in fact, declined this month – that’s not part of CPI, but an anecdote that the payments crisis in rental housing is exaggerated I think. Much worse in office rents though! Work from home is killing office complexes but that’s not in the CPI.
• I’m also still looking for the anecdotal pressures we are seeing in medical care, which haven’t yet showed up.
• Do remember of course that the #Fed doesn’t care one bit about inflation. But if you do, and have interests in how to hedge/invest in the inflationary period approaching, visit https://enduringinvestments.com and drop us a line.
• And one more thing: I’m scheduled to be on @TDANetwork tomorrow with @NPetallides at about 5:20ET. We’ll be talking about investing to hedge inflation. And probably other inflation stuff. Tune in!
• OK, buckle up that chinstrap for a little BLS data roller derby. The game is housing, versus everything except housing. I think a better chance for a high surprise than a low surprise. See you on the other side in about 7 minutes.
• Well…nope! m/m core CPI only +0.01%, so y/y declines to 1.63%. Big surprise to me. A modest surprise to the consensus. Let’s see what happened there.

• Another big decline in Lodging Away from Home, -3.2% m/m…after it has already fallen so far. That’s part of this. Big drop in Medical, more on that in a moment.
• Overall, interestingly, Core Goods rose to 1.2% y/y from 1.0% (and 0.4% two months ago), but Core Services fell to 1.7% from 1.9% (and 2.2% two months ago).
• Core goods. This is super interesting…hasn’t been this far away from deflation since 2012.

• Apparel also took another dump, -1.16% m/m. Used Cars was down slightly, -0.08% m/m. As previously noted, the big spike in private surveys was already in CPI.

• One more covid category that’s surprising: airfares, +6.3% m/m after -2% last month. It’s seasonally time for airfares to rise but this means they rose even more. Then again, they’d fallen so far that was easier. Still surprising.
• Now to housing: Primary rents rose 0.16% m/m, more than last month’s 0.12% but the y/y still slowed to 2.67%. Owners’ Equivalent Rent was +0.22% vs 0.06% last month, holding the y/y steady at 2.50%. These numbers make lots more sense.
• So not really housing pushing down vs ex-housing pushing up…housing was stable, only a touch soft; and some categories were strong. But some were really weak and oddly so. Medical for example.
• Here is the Medical Care CPI subindex, y/y. It absolutely tanked this month. Pharma fell into deflation y/y. Doctors’ Services fell to 1.87% y/y from 2.09%. Hospital Services were -0.58% m/m!

• THAT is the story of this month’s CPI, I think. I should note there isn’t a lot of reason to think that PRICES should be DECLINING in health care as COSTS rise precipitously.
• This could be a compositional issue: the costs of telehealth are lower than for doctor visits, so even though the costs of medical procedures in-hospital are rising a lot, the smaller decline in a wider spending item may be dominating.
• Health Insurance costs are dropping sharply on a y/y basis, down to +10.2% from +14.1% last month. Still high obviously but the wave is receding. Reminder that health insurance in the CPI doesn’t measure insurance policies but the implied profitability.
• It has been my expectation for a while that the rise in health insurance inflation, b/c of how it’s measured, might be catching inflation that hadn’t been caught yet – hard to believe insurer profitability soared like that. But so far, haven’t seen that in the rest of medical.

• That said, data collection issues in medical care right now might have something to do with this. The BLS isn’t currently hammering health care workers to respond to its surveys/calls, for obvious reasons.
• Motor Vehicle insurance, to change topics here, was also weak again. People aren’t driving so much so insurance companies are cutting prices and/or rebating a lot (generally required by insurance boards in a lot of states when claims are less than expected).
• Here is car insurance y/y. It’s actually 1.7% of CPI, so it matters.

• Month’s biggest declining categories in core (annualized chg): Infants’ and Toddler’s Apparel (-34%), Lodging AFH (-32%), Men/Boy’s Apparel (-30.6%), Jewelry/Watches (-24.5%), Motor Vehicle Ins (-24%), Women’s/Girls Apparel (-10.6%).
• Biggest increases: Car/Truck Rental (+136%), Public Transportation (+36.5%), Footwear (+14.6%).
• Early peek at Median…my guess is +0.16% m/m, which would make the y/y 2.46% (2.51% last month). Not exactly deflation, but certainly off the highs. Don’t get used to it.
• The “Inflation Angst” index, which is our calculation of “perceived” inflation minus core inflation, declined slightly this month.

• Four Pieces charts. First piece: Food & Energy

• Core Goods. This is a story, and a little surprising if this continues. This includes Medicinal Drugs, by the way, which is in deflation – so very curious. Supply-side constraints meeting big cash infusions to consumers: you don’t buy more services, you buy more stuff.

• Third piece, core services less rent of shelter. Big drop, mainly due to medical care. Again, I think that is the real big story and surprise this month. I have a SUPER hard time believing that hospitals and doctors are going to be cutting prices in a COVID world. Even post.

• Lastly, Rent of Shelter. A lot of this is Lodging Away from Home – Primary Rents and OER stabilized some this month. And rents are not going to slide (asking rents aren’t) in a world of rapidly rising home prices. See my recent look at housing here: https://inflationguy.blog/2020/10/23/the-outlook-for-housing-inflation-from-here-oct-2020/

• Last chart before I wrap up: since I recently wrote about the broadening of inflation here’s a tiny update to the Enduring Investments Inflation Diffusion Index (EIIDI). Declined modestly to -16 this month.

• OK, summing up…this month’s number was broadly tame, with the notable exception of medical care. Housing, other than Lodging Away from Home, was stable. Airfares showed a surprising increase. But the big story, and the one that I have trouble believing, was medical care.
• Disinflationistas should probably not take a lot of comfort in this number, but surely neither can inflationistas. So whatever -ista you are, ista unexciting number fer ya.
• Going forward – we still have this little issue of a massive increase in the transactional  money supply. There’s no way to make it go away easily. Uncertainty will keep cash balances high and velocity low – but any recovery in confidence could unleash the spending beast.
• We are already seeing that in core goods. Now, if the Fed and Treasury somehow get religion, the inflation surge might be only modest, 4%ish next year is my guess. But we just elected people who believe in MMT, assuming Biden/Harris counts are confirmed by the states.
• Not that the monetary authorities were behaving particularly responsibly in 2020, but if the MMT crowd gets traction things could get super ugly. Thankfully, not today’s problem. Right now breakevens are down a few bps, but  still way cheap to where I think they’re going.
• That’s all for now. Thanks for tuning in. Remember I’ll be on @TDANetwork tomorrow evening, 5:20pm ET or so! And stop by http://enduringinvestments.com if you wonder what it is we do.

This was a long one this month, so I won’t add a whole lot to what I wrote above, and what I wrote recently about housing. Maybe I need to do one on Medical Care, but that’s a fairly inscrutable index that’s hard to model especially at times like this when there are lots of moving parts. But the bottom line for medical care is – it’s becoming lots more costly to practice. As I mentioned, there might be savings in the transition of more routine monitoring care to televisits from in-person visits, but I’m not sure how much of that is permanent: an important part of even a routine checkup is looking for things that the patient might not be able to observe directly, e.g. glandular swelling. Moreover, everything else that is in-person has become lots more costly to do, and this is likely to remain the case even after COVID is long gone (to say nothing of the fact that hospitals are going to need to recoup lots of revenue lost on elective surgeries over the duration of the pandemic). So I don’t know exactly what is going on there, but it’s really hard for me to imagine that medical care is getting vastly cheaper.

Now, in pharmaceuticals (“Medicinal Drugs”) the answer is a little less clear. Back in August I wrote about what the President’s push to make Pharma companies accept “Most-Favored Nation” clauses would mean for domestic drug prices. My conclusion in part was “I suspect that most pharmaceutical companies will end up lowering prices a little bit in the US and in other countries where prices are similar, and only selling them in countries that now pay a very low price to the extent that those foreign countries and/or international charities subsidize those purchases.” So maybe that’s part of what is happening here. If it is, then we can expect that to change pretty rapidly under a President Biden, who seems bent on reversing by executive action pretty much everything that President Trump did over the last four years. (I suspect that this might have something to do with the timing of Pfizer’s vaccine announcement, after the election!) But in any event, I think it’s unlikely that we are about to enter a period of sustained deflation in the price of drugs. And outside of that, this month was fairly normal on the inflation front. To be sure, that means inflation was lower than it was in July and August, but it also isn’t really at zero.