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! Get the Inflation Guy app in your app store! Check out the Inflation Guy podcast!

• Happy last- #CPI – day-of-summer! Is the transitory spike over?
• Before we get started, a little housekeeping. Get the Inflation Guy app in your app store! And if you want to see some super-embarrassing photos of me, check out the Bloomberg Businessweek story just out today by @beth_stanton https://www.bloomberg.com/news/articles/2021-09-14/inflation-guy-michael-ashton-sees-more-on-the-way-as-investors-worry
• The story is terrific. Beth is a fantastic journalist. But as for the pictures…I can just say, “I’m working on it.”
• Anyway back to our story…This is the first time in months that the interbank CPI market has been at or slightly below the economist consensus estimate for headline inflation. (Pretty close though.) Previously, the interbank market was generally higher, and more accurate.
• The last five actual prints on core CPI are +0.34%, +0.92%, +0.74%, +0.88%, and 0.33%. The consensus for today is a lowish 0.3% (something like 0.27%).
• So economists – and the inflation market – are pricing in at least a LITTLE ‘transitory’ here with core inflation coming down from the peak…although I’ll note that 0.27% annualized is 3.3%. That’s still well above the Fed’s target. Not that they care very much.
• That sort of month/month core CPI print today would see y/y drop to 4.2% from 4.3%, since last year we got +0.35% in August. Transitory! Yay! We win! Except that celebration will be short-lived.
• The next 6 months of core range from +0.03% to 0.19% m/m. Very easy comps. So unless something weird happens, core inflation is going to be higher in 6 months than it is today.
• I think there’s a little upside risk to the number today, partly because expectations are so tame. Used cars, which are past the y/y peak, still rose in price last month according to Black Book. So that would be a surprise.
• However, that would distract from the more important issue this month and going forward: with the eviction moratorium lifted in many parts of the country, how fast do those units turn over at much higher rents?
• I don’t really think that will be a big effect THIS month – too soon – but it will become increasingly important going forward. I’d even say it is THE story going forward in terms of how high core CPI will get in this ‘transitory’ bump.
• OER and Primary Rents have started to see a little bump higher, although they were softer last month than in the prior month. I’m trying not to be obsessed with the wiggles. Anyway the lows are long past for rents.
• Let’s be real: just as people waved away Used Cars as a “reopening category” or “idiosyncratic,” they’ll say the same with housing. “One time effect!” they’ll say.
• But what will be harder to explain away will be inflation’s BREADTH. Our diffusion index is the highest in years, because it’s not JUST the reopening categories.
• So be careful of all the “ex-cars” and “ex-reopening categories” metrics. They did that in the 1970s too. An increase in the number of anecdotes is what inflation IS, after all. Go listen to my “Diamond Water Paradox” podcast. https://InflationGuy.podbean.com/e/ep-2-diamondwater-paradox/
• The PPI is telling us that the upstream pressures on materials, shipping containers, wages, etc are strong, and those pressures are broad. Yes, a lot of em are pressures on goods and not services. But it’s much more dangerous than hotel prices just catching up to the prior drop.
• The next question people will ask: “Does this print mean the Fed taper is on?” And the answer is, I give a taper a 50-50 chance of starting and a 15% chance of completing. I don’t think the FOMC will be able to stomach the market correction.
• So buy dips in breakevens if you see them, but I’d be more skeptical at selling nominals outright. Not sure the Fed will lock nominal rates as they did post-WWII, but they’re leaning against you.
• And I said this last month and repeat it: Stocks probably go up either way on today’s number, because that’s what stocks do these days (until they don’t).
• That’s all for now. My gut says a better chance for a high surprise than a low surprise today. And watch what happens to median CPI, later. Get the Inflation Guy app! Listen to the podcast! Follow the blog! https://mikeashton.wordpress.com Visit us at https://enduringinvestments.com  ! Good luck!

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• Team Transitory starts a comeback with a goal just before halftime!
• 0.10% on core m/m, dropping the y/y to 4.0%. Not just a miss, but a big miss.

• Used cars fell hard, -1.54% m/m. Last month I pointed out the m/m movement in the private surveys is only the same SIGN about half the time. But I fell for that this month as Black Book went up but CPI went down.
• Lodging Away from Home -2.92% m/m. Gosh, wait a minute, look at this…
• Are we going to have to call these the “re-closing” categories? Airfares -9.11%. Lodging AFH -2.92%. Used cars -1.54%. Car/Truck Rental -8.48%. Wow!
• However, New Cars and Trucks – where you’re seeing the chip shortages and plant shutdowns for want of parts – was +1.22% m/m.
• OER was +0.25% m/m, and Primary Rents put in a larger rise to +0.31% m/m. So let’s not get too excited about that miss right now…
• Primary Rents, re-accelerating slowly. It will not be long until this is over 5%.

• And OER. Again, these are the big pieces.

• So core goods fell to +7.7% y/y from +8.5%, and core services fell to +2.7% from +2.9%.
• Worth noting as the Biden Administration goes after pharmaceutical producers: CPI for Medicinal Drugs remains in deflation. Go get ’em, Joe.

• Core CPI ex-shelter (which means less when Shelter isn’t leading the charge) fell to 4.79% y/y. In June this was 5.81%.
• Apparel was +0.37% m/m, keeping y/y at 4.2%. Apparel is a small category, but we import almost all of it. So it isn’t surprising to see this rising for a change (but last month it had declined). At a 3% weight in the basket though, it doesn’t dominate anything.
• Medical care outside of pharmaceuticals was flat in Doctor’s Services (+0.01% m/m), but up big in Hospital Services (+0.85% m/m). So the overall Medical Care subindex gained despite the weakness in drugs.

• It’ll be interesting looking at the breadth this month. Seven of the eight major subindices rose, with only Transportation declining due to the Used Cars flop. Still shaking my head at the re-closing categories.
• College Tuition and Fees +0.88% m/m. But that doesn’t annualize the way you think it does. It always jumps in August and September and then levels out for 10 months. The y/y is up to 0.83%. This is NOT quality adjusted, or it would be lots higher.
• So the biggest decliners in non-food-and-energy: Car/Truck Rental (-65% annualized), Public Transportation (-49% annualized), Lodging Away from Home (-30%), Motor Vehicle Insurance (-29%), Used Cars and Trucks (-17%).
• Biggest gainers: Jewelry and Watches (+23%), Motor Vehicle Parts and Equipment (+22%), Household Furnishings and Ops (+16%), New Vehicles (+16%), Men’s and Boys’ Apparel (+13%).
• So…here’s the thing. My early guess at Median CPI is +0.33% m/m, which would be the highest since early 2007. So folks, this isn’t as tame a number as it looks like. Rents are rising, and inflation is broadening.

• If you took out Used Cars, Lodging Away from Home, etc when they were spiking, then to be fair you should be taking them out now when they’re declining. Because that’s most of the story here.
• Quick chart of y/y core goods and services inflation. Core Services has a much larger weight, and much of it is rents. Core goods off the boil but has a ways to decelerate yet.

• Let’s do the 4-pieces chart and the diffusion index then wrap up.
• Piece 1: Food & Energy. Steady upward pressure, but of course this tends to be mean-reverting.

• Core goods – I already basically showed this chart. Used cars starting to decelerate and pull this down, but New cars accelerating. And broad pressure elsewhere. Watch this. If it goes only back to 3%, that’s a big deal. It’s been a deflationary force for many years.

• Core Services less Rent of Shelter. Steady downward pressure in pharma, but upward in hospital services. Downward in public transportation. But still, not collapsed yet.

• And piece 4, rent of shelter, the biggest and slowest and the story for the next year-plus. Going lots higher.

• Actually while the diffusion index is calculating let me start the wrap-up. First: this number was truly weird in that reopening categories that had been leading the so-called ‘transitory’ spike were the ones that went down. I don’t know that anyone was looking for that.
• But OUTSIDE of those “re-closing” categories, inflation was pretty solid. Rents and OER rose, although we haven’t yet seen much effect of the end of the eviction moratorium. We will. And there was pretty good breadth.
• So what does this mean for the Fed? GREAT NEWS! A larger-than-expected decline in core CPI will give the doves what they need to demur on tapering. I think the odds of tapering just dropped. But they didn’t much want to taper anyway.
• I don’t think this really changes the narrative – rents are going to drive core inflation higher, and the broadening inflation is going to help un-anchor inflation expectations – but it gives the most dovish Fed in 40 years cover.
• 10-year breakevens at this hour are -2.5bps or so. They’ll be a little heavy as the carry traders lighten up, but this is a dip that is worth buying IMO. Of course, there aren’t many retail products where you can make that play.
• Here’s the last chart. I pointed out the rents thing, which will be one big story going forward. The other is the broadening of inflation. The Enduring Investments Inflation Diffusion Index declined (vy slightly) this month, but it’s still at levels rarely seen in last 20 years.

• That’s a wrap for today. I appreciate the follows, re-tweets, and counterpoints. If you’re interested in investing implications of all of this, hit our contact form at https://www.EnduringInvestments.com  Download the Inflation Guy app. Try out the podcast! Thanks for tuning in.

The upshot of today’s figures is simple: we expected the Used Cars, Hotels, and other “COVID categories” to flatten out after their big rebound. But no one that I know was looking for them to plunge again. That’s weird, but it makes analysis pretty simple. If you thought that it made sense to look through those one-off spikes to the underlying trends before (although the underlying trends weren’t all that encouraging, they were better than the spikes!) then you ought to probably look through the re-collapse. And outside of those “re-closing” categories, inflation is broadening and rents are accelerating, just like I’ve been expecting. So don’t get too excited that we’ve seen the peak in inflation just yet.

Remember the comparisons to last year get super easy here for the next six months. September 2020 was +0.19% on core inflation; then we have +0.07%, +0.17%, +0.04%, +0.03%, and +0.10%. And Lodging Away from Home won’t plunge every month – I’ll take the “over” on all six of these. And that means y/y core inflation is going to be accelerating from today’s 4.0%, for at least the next six months.

Moreover, median inflation is going go be rising towards those numbers too, as will trimmed-mean and the other better measures of the inflation distribution’s central tendency. There’s not much in this figure that is bona fide good news for the Fed. But I think they’ll take the win anyway, even if it’s on a bad call by the referee.