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!

• Hello #CPI Day. Is it my imagination or do these keep getting better? Today we should see a 31-year high in headline inflation and the second-highest Core #inflation in 30 years. And, honestly, there’s a chance we break June’s high on core.
• It actually doesn’t matter much if we move to 30-year highs on core this month because it will certainly happen over the next few. We are entering the easy-comparison part of the year. Oct ’20 through Feb ’21 had a CUMULATIVE 0.42% on core CPI.
• And it isn’t just core. Last month, the theme of broadening price pressures took a big step forward as MEDIAN CPI had the largest m/m jump since 1990.
• A lot of that has to do with rents, which are starting now to catch up after the lifting of the eviction moratorium. As expected. There is a lot more to go on rents.
• So the underlying themes this month are the same as they have been recently: broadening pressures and less attention on the one-off COVID categories…although…
• There will be plenty of volatile noise – that’s not going away soon, and it will contribute to inflation expectations since people encode price volatility as increase. Food inflation will probably be the highest in a decade.
• Wholesale gasoline has risen 10 months in a row. Hey, how long has Biden been President, roughly? I mean, counting his naps? (Sorry, that’s piling on and a 15-yard penalty.)
• Used cars (and new cars) are also a risk this month. Last couple of months, used cars were a drag as the spike was fading. Not so much. Private surveys are spiking again. We probably see that this month, “a chunky amount”. Here is the Black Book survey.

• And here is the change, vs the CPI for used cars, lagged. You never know about the lags though.

• Now, policymakers are expressing the opinion that the very high inflation numbers we are seeing now will fade later in 2022. They’re right. There are some signs here and there that certain bottlenecks are easing.
• The inflation noise is going to gradually lessen. Unfortunately that means we’re seeing more of the SIGNAL, which remains strong. Pressures OUTSIDE of the ‘reopening categories’ are broad. So core inflation will stay high (just not THIS high, probably) through 2022.
• And as shortages get resolved, they’ll likely resolve at HIGHER prices, not lower. See my article “Shortages are Unmeasured Inflation.”
• & the causal elements remain. The Fed is tapering but credit growth has been hot.The idea banks are being stingy w/ credit is either false, or they’re being replaced by non-banks. M2 growth is down to ~13%, but that’s still WAY too fast. Especially as velocity recovers.
• Onto this month’s report: the Street is expecting a soft +0.4% on core, which would be the highest since June. I kinda think that’s the best case unless OER and Rents abruptly slow down again. Last month’s 0.24% on core only happened because the one-offs pulled it DOWN.
• The interbank inflation derivatives market has y/y headline hitting 5.94% today, breaking to 6.5% next month, and staying over 6% until April. (Some of that is due to base effects in energy and core.)
• I expect Rents to continue to move higher. Looking for that, & watching Median CPI. It’s at 2.42% y/y and will be higher this month; will be over 3% before very long. That’s where I think everything ends up settling out, late in 2022: 3.5%ish. Not as bad as now…but not good!
• Good luck this morning. I will have a summary of all my tweets at https://mikeashton.wordpress.com sometime mid-morning and then I plan to put out an Inflation Guy podcast (https://inflationguy.podbean.com ) sometime today. And let me take a moment this month to say: Thank you Veterans.

---

• Welp. Golly. 0.60% m/m on core CPI, putting the y/y up to 4.58%. A new 30-year high! And easy comparisons still to come…

• So let’s see. Used cars +2.5% m/m, which we sort of expected. OER +0.44% m/m, and Primary Rents +0.42%, which we sort of expected.
• Apparel? 0.00% m/m. Which means all the other 7 major subcategories contributed. Recreation +0.69%. Medical Care +0.50%. Housing +0.72%. Food/Bev 0.84%. Other +0.85%. Educ/Communication only +0.16%. Transportation +2.37%. Broad.
• Airfares: -0.66% m/m. But lodging away from home +1.35%. If you consider used cars a covid category (I don’t), then covid still net adding to this number. But then, everything was.
• New cars +1.36% m/m after +1.30% last month. Used car prices can’t be above new car prices for long – but one way to resolve that is new car prices up, not just used car prices down.
• Car and truck rental +3.1% after -2.9%.
• In Medical Care, “Medicinal Drugs” +0.59% m/m. It is still down y/y, but is this a sign up upward pressure in a category that has been soft for a while?
• Doctors’ Services flat, but Hospital Services +0.45% m/m, up to 4.04% y/y. I wonder if laying off lots of unvaccinated nurses will lower prices for health care? Hmmm. Guessing no.
• Overall Core Goods rose back up to 8.4%. But more disturbing is core Services jumping to 3.2%. Again, a lot of that is in rents.
• Food prices y/y up at 5.33%.
• Oh my. Oh my oh my. My first guess at median CPI is +0.57% m/m. That would EASILY be the highest since 1982 if I’m right.
• The really scary thing is that I’m looking for a big outlier. And I can’t really find one.
• Postage and delivery services were up +3.87% m/m. But that’s 0.11% of the CPI. Cigarettes +2.08%, but that’s 0.53% of the CPI. Health Insurance +1.99%, and that’s 1.2% of the CPI. Airline Fares, +3.5%, but 0.6% of the CPI.
• The only category that declined more than 10% annualized was Jewelry and Watches (-26% annualized m/m). There were 19 that ROSE more than 10% annualized.
• Core CPI ex-shelter back up to 5.35%. Sure, a lot of that is autos. But you kinda want that to go down especially when shelter itself…
• OER is catching up to the model…but the model is running away from it too.

• Here are the four-pieces. Piece 1, food and energy. Highest since just before the GFC.

• Piece 2 – Core goods. Near the highest since 1981 (only the bump in June was higher).

• Piece 3: Core services less rent of shelter. At last! Something that isn’t near 30-40 year highs. But these are the slower-moving pieces. Maybe it’s because they haven’t had time yet to adjust…

• Piece 4. Rent of Shelter. The part everyone was hoping wouldn’t follow home prices and asking rents. Sorry about that. It’ll shortly be at 30-year highs too.

• So this is starting to be less-subtle. Last month’s distribution of y/y changes vs this month (“OCT”). Left tail vanishing. Right tail growing. And whole middle shifting to the right. Not subtle. Not isolated.

• Here is the weighting of components of CPI that is inflating faster than 4% y/y. Almost 40% of the entire basket.

• 10y breakevens +5bps on the day to 2.69%. But that’s okay, Secretary Yellen tells us there’s no way that inflation expectations get unanchored.
• I suppose it should be no surprise that the Enduring Investments Inflation Diffusion Index has reached an all-time high.

• OK, let’s sum up. Different month, same story. There is still noise associated with “shutdown categories” and specific bottlenecks. But the underlying “signal” of inflation is getting stronger, as the pressures get broader. You can’t blame all of this on Long Beach.
• Those pressures don’t come from the bottlenecks and shortages. They come from the fact that people can afford to pay higher prices because there’s more money in the system. Here is a chart of personal income vs GDP. Demand and supply. Where did the difference come from???

• This ain’t rocket science. If you want the fire to stop, remove the oxygen. Oh, wait, actually that IS rocket science. Like, actual rocket science.
• The Fed is finally slowing the rapid increase of its balance sheet. Be still my heart. Honestly, I don’t think they’ll even finish the taper, much less start to raise rates. Especially under Brainard. So buckle up. Lock in long-term contract prices.
• I need to go take a shower. As much as the trajectory of inflation makes it fun to be “Inflation Guy,” this is monetary malpractice and it’s disgusting. This didn’t have to happen. Sorry. That probably shouldn’t be tweeted.
• Anyway – the beatings will continue until morale improves!
• Thanks for tuning in. There will be a tweet summary on https://mikeashton.wordpress.com  in a little while.And I’ll drop a podcast later today. Interested in the new strategy we’ve launched, or want to work with us to launch one for your clients? Go to https://enduringinvestments.com & contact us.

Seriously, this month’s report – while expected, at some level – turns my stomach. We have learned these lessons, painfully, long ago: you can’t spend in an out-of-control fashion and you can’t print the money that you’re spending. That’s fiscal policy 101 and monetary policy 101. Flunk them all, I say.

The good news is that we no longer need to argue about whether or not inflation is coming. It’s here. We don’t need to argue about whether inflation will broaden beyond the re-opening categories. It has. The only questions are: how much? For how long? And how do we stop it? The third question we already know the answer to: restrain money growth; even shrink the money supply if velocity continues to rebound. No, that’s not against the rules. But it is against current monetary orthodoxy, which regards no particularly interesting role for the quantity of money. Flunk them all, I say.

The answers to the first two questions, how much and for how long, depend on how long it takes for policymakers to change course. On the fiscal side, there seems to be growing resistance to the idea that you can spend any amount of money because you can always print a trillion-dollar coin. But there are still some who profess to believe that if you spend more, you can solve bottlenecks by improving infrastructure. Maybe, if this was about infrastructure. But it’s not. It about spending in an out-of-control fashion and printing the money that you’re spending. On the monetary side, our choices seem to be another ride with Chairman Powell – who is the one who brung us to this party and I don’t really want to dance with him – or Lael Brainard, who thinks Powell has been too hawkish.

Do you see the problem?