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!

• Another #CPI morning as spring is getting ready to spring here in the northeast. And with spring, more activity.
• Today’s #inflation figure will be the last one to be compared to pre-COVID year-agos. The easy comps start next month. So, while consensus today is for +0.2% on core, that will still not move core much since last Feb it was +0.21%.
• Headline will jump a bit, because gasoline has been rising, but the real headlines if any will be below the hood. Last month core was flat, due to soft housing and a somewhat surprising decline in used cars and pharmaceuticals.
• I expect we will see the used cars number reverse this month (Black Book was strong), and with the end of lockdowns might see some strength in the covid categories. Pharma price hikes ought to eventually show up. But they’ve been confounding me.
• Global supply chains are a disaster and raw materials and packaging prices are spiking – the Texas freeze shut-down did NOT help polypropylene prices! – so goods prices ought to continue to rise. Eye on apparel as the canary there.
• The rent story is a passing one. But probably not yet, which means OER and Primary Rents should still look a little soggy. Asking rents are jumping, but measured rents are not – because of the eviction moratorium. If you’re not paying rent, it’s not a cost of living!!
• In this quarterly chart, you can see the divergence between asking and realized rents. The divergence began in Q3…which is when the eviction moratorium was enacted. That’s not coincidental.

• In the more-recent COVID relief bill, the eviction moratorium was not extended past March 31st, which was a bit of a surprise. That could still change, but when the moratorium eventually expires I am pretty sure we’ll see a rapid catch-up of rents. But not today’s story yet.
• My calculations are that if the end of the eviction moratorium caused effective rents to catch up to asking rents, the effect on OER and Primary Rents would add something like 0.9% to core CPI.  (!) So that’s 2021’s following wind to prices.
• As always, I want to be sure to remind you that the Fed does not care about inflation any more. Someday they will, but not yet. They’ve even stopped reporting weekly M2! They believe they have the tools to stop inflation so they’re not worried. Ergo, you’re on your own.
• Although not exactly. We’re here to help. If you have interest in how to hedge/invest in the inflationary period approaching, visit https://www.enduringinvestments.com
• And for a summary of today’s series of tweets, you can check later at https://mikeashton.wordpress.com
• Thanks for coming with me on this #CPI journey this morning. Buckle in.
• Core looks like 0.10% flat, dropping y/y to 1.28%. That will be the low for…probably 10 years.
• Even the +0.1% was higher than the last couple of months. But the easy comps start next month. Then some hard ones. But by the time we get to the hard comps, rents should be catching back up. Worth looking at my “conflicting frames” piece on the blog.

• Used Cars and trucks surprisingly fell again, -0.91% m/m. That’s at odds with the private surveys, but there’s sometimes a wiggle before they catch up.
• Apparel dropped -0.74% m/m. Also odd. Pharma PLUNGED -0.75% m/m. As a result, the core goods y/y figure dropped to 1.3% from 1.7%! That’s the story.
• Rents were actually okay! OER was +0.27% and Primary Rents +0.20%. Really, today’s story in some ways is the opposite of what I expected. Rents solid, goods prices soft.
• Really odd stuff today. Airfares -5.1% m/m, despite the heaviest air traffic in a year. Lodging Away from Home -2.3%, ditto. Although some of that might be a weather effect. Still anti-anecdotal.
• Doctor’s services, though, jumped +2.01% m/m! To 5.1% y/y, highest in a while.

• Hospital services remained a bit soft. Still, the overall Medical Care subcategory accelerated slightly to 2.00% y/y from 1.95% y/y, despite the drop in Pharma, thanks to docs.
• So Core ex-housing dropped, to 1.16% from 1.25%. But for weird reasons, not services but goods!
• Core goods and services back together after core goods had rocketed ahead. Again, this is super weird. Shipping costs are through the roof. Packaging and raw materials prices are having moves like we’ve never seen. And goods prices are declining?

• sorry…decelerating. Let me be precise.
• Biggest monthly declines in core: Jewelry (-29.9% annualized), Lodging Away from Home (-24.4%), Public Transportation (?) (-24.0%), Men’s/Boys’ Apparel -23.6%, Infants’/Toddlers’ Apparel -21.6%, Tenants’/Household Insurance -13.5%, Used Cars/Trucks -10.3%.
• The decline in insurance makes sense. Insurance companies are having to give rebates because their loss ratios were too good (that is, they didn’t have to pay out as much as underwriting had expected). So that will be a CPI decline. I get that. Only 0.4% of CPI though.
• Largest core increases: Car/Truck Rental (+135% annualized), and that’s it for >10% annualized.
• Pharma y/y. Difficult supply chain for APIs and more announced price hikes in January than is normal. And prices are falling. That’s a conundrum.

• This is the divergence I mentioned in private surveys vs CPI for used cars and trucks. I could believe it cresting at a lower level but the latest zig higher suggested we have another zag in CPI. Next month, maybe.

• Brilliant catch. Although lockdowns are lifting, the BLS had trouble doing some collections. More likely weather, but blamed on Covid because we blame everything on Covid. But that explains a lot of weird moves. Good catch @TOzgokmen

• Well, that makes next month even more interesting. Because the rent numbers aren’t likely to have been much impacted by weather, but physical goods prices?
• And again, like I said the other surprise was that rents did not continue their recent trend of softness. Y/y on OER was flat. There’s a lot of catch-up ahead.

• One thing which has changed in the last year which isn’t likely to change back very soon is the VOLATILITY in the monthly CPI figures – not just the core or headline, but the subcomponents. That will persist for a while.
• OK, four pieces charts. Food and Energy relatively normal.

• Core goods – slightly off the boil but will be interesting for sure to see how much of this was due to “collection problems” at BLS.

• This is where there’s real weakness, but it’s airfares, hospital services…though doctor’s services added a bit this month. Insurance rebates likely pressured this in February. Again lots of volatility.

• And then Rent of Shelter, normally the least volatile. This month, rents were actually pretty normal but lodging away from home dragged further. I do think that hotel rates are unlikely to keep sliding. This might also be a collection issue.

• Think that’s going to do it for today. The bottom line is that rents were stronger-than-expected, lots of other things weaker, but collection issues make it easy to be skeptical that goods prices are suddenly decelerating. Next month we’ll get hopefully a cleaner picture. BUT…
• …BUT we will also get the beginning of the severe base effects. In three months, core CPI will be near or above 3%. We all know it, but it will be interesting to see if markets get nervous anyway. Thanks for tuning in. Stop by https://www.enduringinvestments.com !
• FWIW, looks to me like median CPI ought to be more like +0.26% compared to core +0.10%. My confidence in that is lower than usual because of something quirky with my spreadsheet, but it highlights that the core was dragged down by large declines from small categories.

The best observation of the day wasn’t mine. The problem with pulling in data automatically, rather than reading the report, is you will miss the footnotes! And the footnote pointed out by @TOzgokmen was a very important one. It slaps much larger-than-normal error bars around what are already more volatile-than-normal data. I suspect that this was not likely to have a big effect on rent data collection, but more likely on goods and services where specific outlets were likely to be closed by the bad weather. I may be wrong about that, but it does go a long way to helping understand the weird fact that rents were solid (instead of weak as expected) and goods prices were weak (instead of strong as expected). One never should put too much weight on any one month’s figure, but this diminishes the anecdotal value even more. On to next month.