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!

• Good #CPI inflation morning! We see 2021’s first #inflation figures of the year today, although the themes will be familiar.
• Rents rents rents! The main culprit behind the steady softening of core inflation in recent months has been Primary and Owners’ Equivalent rents.
• This softening has happened, as I’ve pointed out a lot, even though asking rents (outside of the big cities) are moving higher with prices – see this decent story here about the divergence: https://wolfstreet.com/2021/02/02/big-city-exodus-housing-distortions-rents-plunge-in-most-expensive-cities-but-explode-in-others-boston-plunge-steepens-san-francisco-plunge-pauses/
• Now, this picture is quarterly, but it’s Median Asking Rents from the Census Bureau. Latest figure is Q4. You can see that ASKING rents have not been softening. In fact have been accelerating along with home prices.

• But landlords have been collecting less rent, and expecting less rent, and so in the BLS calculation this shows up as less growth in rents. But it’s also cyclical.
• It does look to me like rent collections stayed soft in January but it’s hard to tell a priori. Anyway that’s the story with rents and we’ll watch that.
• Outside of rents, it’s a different story. On the services side, still soft especially in medical. And that still confounds me. How is medical inflation so low with a medical crisis on our hands? Head-scratcher.
• On the goods side, we have pressure in pharma coming from price hikes from some major manufacturers in Jan (more than usual seasonal), and we have a GENERAL CRISIS on the supply side.
• Shipping rates have skyrocketed. Raw goods prices have been rising rapidly.
• It’s weird to say keep an eye on apparel, because it’s a small weight and has rarely been anything but soft for years. But apparel uses fabric and lots of fabric uses resin. And resin has tripled in price over the last couple of months. And most apparel is imported.
• Anyway, core goods should stay robust.
• What that means for overall core CPI is hard to say. As I wrote recently (and it’s worth reading), there are a lot of  conflicting frames right now: https://inflationguy.blog/2021/02/04/the-risk-of-confusing-inflation-frames/
• The ‘fog of war’ will make interpreting this number very hard for the next 6-8 months. Which means policymakers will easily ignore it no matter what it does, even though the #Fed doesn’t care about inflation.
• But if YOU care, and have interests in how to hedge/invest in the inflationary period approaching, visit https://enduringinvestments.com
• That’s all for now. Good luck. The consensus estimate is +0.17% on core, keeping the y/y at 1.5% (rounded down). I will look at ex-housing and think there’s some upside there. We’ll see.
• Well this breakdown will be fun. Core CPI flat (waiting on BBG to post the actual number so we can see how flat).
• OK, 0.03% on Core. Y/y 1.40%.
• Apparel +2.21% m/m. Like I said, that’s only 2.8% but all of the supply issues converge on that category. Apparel is still -2.57% y/y.
• Primary Rents +0.11% for second month in a row. OER +0.14% for the second month in a row. Neither is sustainable when home prices are spiking. Y/Y is 2.05% and 2.01% respectively.
• Lodging Away from Home, a “COVID Category” -1.88% m/m. So I think we can see Shelter was a big softee.
• Other COVID categories: airfares -3.18% after -2.46% last month; Used Cars & Trucks -0.89% after -0.90% last month. But Motor Vehicle Insurance +1.13% after +1.42% last month.
• In Medical: Medicinal Drugs -0.25% m/m after -0.24%. That makes little sense. Although seasonally we expect price hikes in January, there were many more price hikes this year than in a typical year.
• This number is weird all over in that many m/m changes are almost identical to last month’s changes.
• Doctor’s Services +1.55%, Hospital Services +0.27% m/m. That’s good to see. I mean, I support doctors.

• So overall, core services dropped from 1.6% y/y to 1.3% y/y (!) while core goods stayed at 1.7% y/y. I rather expected the latter to rise, especially with the apparel jump, so will have to dig deep on that one.
• So core CPI ex-shelter dropped from 1.45% y/y to 1.25% y/y.
• Let’s see…biggest declines m/m (in core) were Lodging Away from Home (-20% annualized), Public Transport (-18%) (?), Car and Truck Rental (-12.2%), Misc Personal Services (-11.4%) and Used Cars and Trucks (-10.2%). Lots of mobility stuff there!
• Biggest core gainers: Jewelry & watches (+62% annualized), Women’s/Girls Apparel (+44%), Tobacco/Smoking (+24%), Motor Vehicle Insurance (+21%), Footwear (+18.8%), Men’s/Boys apparel (+19%). Lots of imports/manufacturing there!
• Because of the weakness in rents, Median CPI might actually be negative this month. That’s rare! Last year when core CPI was negative three months in a row, median never went below +0.12% m/m.
• So, again, I’m not really worried about rent going to zero here. What we’re measuring is an accelerating underlying trend in asking rents plus a cyclical underlying trend in delinquencies. The latter will fade.

• Of course, I could be wrong. Maybe home prices will collapse. But the divergence doesn’t make a lot of sense. These are substitutes!
• I guess at the end of the day (I hate that term) this report is only surprising in magnitudes.I expected rent might be soft, just surprised at how soft. Expected apparel to jump; it did. I guess Pharma prices were surprising. The rel strength of goods v svcs wasn’t surprising.
• Meanwhile, back in the market…10y breakevens don’t like this report; they’re down 1.75bps. But not sure anything here will change minds.

• After all, the market is already pricing in very low core inflation for the next few years. And 10y inflation isn’t exactly trading at a premium. You’re not overpaying for the chance that inflation has a long-tail outcome to the upside.

• Four pieces. First CPI pie piece: Food & Energy.

• Second piece, and the ongoing story, is core goods inflation. Now above core services, with or without shelter.

• Core services less rent of shelter. Here is where the mobility stuff is dragging us down. One hopes this comes back once mobility comes back.

• And piece 4, what will be endlessly debated: rent of shelter, including lodging away from home. Be careful comparing to the GFC – that was, after all, a housing crisis with collapsing home prices. Made perfect sense then. Makes very little sense now; I don’t see this persisting.

• I think it’s worth touting my own article again, The Risk of Confusing Inflation Frames. https://inflationguy.blog/2021/02/04/the-risk-of-confusing-inflation-frames/ There are lots of crosscurrents here, ‘fog of war’ stuff, will make it hard to discern true trend.
• Rent collections soggy, resin prices up several hundred percent. But meanwhile, there is this. The fog is going to obfuscate any underlying upward pressure on the price level. But I’m really confident that if you increase the global money supply 20%, you don’t get less inflation.

• One more comment on those lines. Next month’s comp on core CPI is +0.22% from Feb 2020. And that’s the last pre-covid comp, which means it will then be a long time before we have a clean picture. In between there may be a state shift that’s hard to see. Be careful.
• That’s all for today. Thanks for following and retweeting etc. A summary will be up on http://mikeashton.wordpress.com  in a little while (linked too from http://enduringinvestments.com ) and will make its way around to other sites thereafter. Have a good day!

I don’t have a lot to add to this that I haven’t already said in the “Frames” piece. There are a lot of crosscurrents here and the comforting thing this month is that they’re the crosscurrents we expected to see! I was surprised at how soft the number was, but if you’d given me the rents numbers I would not have been. One thing I forgot to mention as a driver of apparel isn’t just resin and freight, but also cotton which has been rallying hard for a while too. But this is playing to form.

The question about whether we should be measuring asking rents or actual paid rents is interesting. The CPI is supposed to measure the average prices of what consumers on average consume. And the average rent is clearly declining if more people are paying zero. But since most people aren’t paying zero, the change in the median rent is a better indicator of what most renters will see. Over a full cycle, the differences will smooth out because once eviction moratoria are removed and Americans are mostly back to work, the number of zero renters will decline. But for now, this just helps the conspiracy theorists argue why the BLS is saucing the number to make it low. However, I don’t think it’s wrong or intentionally misleading.

We have one more ‘pre-covid’ comp to see…and for most of the rest of the year after that, we’ll have to place our bets with blindfolds on.