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!

• It’s #CPI day and #inflation has peaked! Yay!
• Well, in a few minutes it will be official: peak CPI has passed. Of course, that’s entirely a mechanical fact due to the fact that core CPI in April, May, and June last year was +0.85%, +0.75%, and +0.80%, and it (probably) won’t be that high this year.
• It certainly doesn’t mean inflation pressures themselves have peaked. In fact Median CPI, which is a better measure of the central tendency of inflation pressures, is almost certain to rise to new y/y highs today. But don’t let the facts get in the way of a party.

• The bigger issue I think is that people confuse peak INFLATION, which is a rate of change, with peak PRICES. Prices aren’t going to fall, even if the inflation rate falls. (Some prices will fall, of course, but not generally). Price level is here to stay.
• Before I go on: after my comments on the number, I will post a summary at https://mikeashton.wordpress.com and later it will be podcasted at http://inflationguy.podbean.com . And all of that also will be linked on the Inflation Guy mobile app. AND….
• What is more, at 1:00ET I will be live with @JackFarley96 on @Blockworks_ to talk (for a long time) about inflation. It’s on YouTube and free, so tune in! https://youtube.com/watch?v=mrG8IHXzlQU  And he had a nice placard made up.

• Back to the report walk-up. The consensus for CPI is +0.2% m/m, dropping y/y to 8.1%. Gasoline should actually be a small drag this month, but contribute again next month. Consensus for core is +0.4%/6.0% after 6.5% y/y as of last month.
• The interbank market isn’t so sanguine; it has been trading today’s headline print at a level suggesting 0.3%/8.2% for the headline number, so a snick higher than economists’ estimates.
• That’s my feeling too. There’s more risk to the upside than the downside in this number today, I think.
• The good news is that truckload rates are coming down, and this tends to precede ebbing in core. Not sure that effect is being felt yet; the typical lead is pretty long and manufacturers I speak to are still assuming high shipping in their pricing.

• And the strong dollar will bring down core goods eventually too (it should decline today but is still double-digits). That is also a long lead. Used cars should drag slightly today. They were -3.8% m/m last month and private surveys have them a smidge lower this month.
• But again, the rate of increase in used car prices is declining mostly because of base effects, not because prices themselves are going back to the old levels. And they won’t. We have 40% more money than we had 2y ago; that’s not consistent with prices where they were 2y ago.
• On the other side of the coin, primary rents surprised on the low side last month. I expect a bit of a retracement higher this month, and I’m still not sure we’ve seen the peak m/m OER rate. Those are the 500-lb gorillas and until they ebb we won’t get 2% CPI.
• As longtime followers know, I’ve also been watching Medical Care for a while. This month I actually saw stories about nurses’ salaries starting to pressure hospital prices higher. So still attentive to that. It’s one of the only sectors that hasn’t really participated.
• We are also eventually going to get a bump higher in college tuition CPI – saw a story y’day about BU raising tuition ~5% (I put the story on the Inflation guy app). But the NSA series mostly puts those adjustments in the summer so we shouldn’t see an inflection yet.
• In the markets, the past month has seen a massive shift in interest rates higher, and breakeven inflation rates lower (the breakeven reversal coming mostly over the last few days). 1y inflation swaps are -58bps on the month. Only some of that is carry.

• Stocks have obviously been under pressure from rising inflation and real rates. Over the last couple of days, the stock market debacle has caused some unwinding of the rate selloff but breakevens are still on the back foot.
• Stocks today seem chipper, but most of that is coming from signs of lower COVID transmission in Shanghai and a sense that lockdowns there may end soon. We will see if they’re still chipper after CPI.
• I still don’t see the Fed as hawkish as what is priced in, mainly because I think they’ll lose their nerve as asset prices fall. I don’t really care about them changing the price of money. I’m watching for a change in quantity of money. So far, not impressed.
• Just 4 minutes to the figure. Good luck!

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• Oh, snap.
• Headline CPI fell to 8.3% y/y, not as far as expectations. Bigger deal is that core CPI was several ticks higher than expected. 0.57% m/m
• I am scrunching up my eyes but I can’t see a decline in inflation pressures here.

• Well, let’s see. Used Cars -0.38% m/m, small drag. New cars +1.14%, though. The spread Used:New needs to close but most of that spread probably will be new car prices coming up. After all, new price level as I said.
• Owners’ Equivalent Rent 0.46% to 4.78% y/y from 4.54%. That’s in line with where it has been. But Primary Rents jumped back up after the surprise last month: 0.56% m/m to 4.82% y/y from 4.45% y/y.
• COVID recovery continues: Lodging Away from Home +1.7% m/m; airfares +18.6%!
• Now, I have been seeing a lot of stories about this one. It’s only 0.04% of the consumption basket but it really hits viscerally. Baby Food, +3.05% m/m, +12,9% y/y.
• Food and Beverages as a whole, +0.84% m/m, +9.00% y/y. Ow!

• Now, I don’t know if this is good news or not but core inflation EX HOUSING declined to 6.8% y/y from 7.5%. Good news is that means some of the outliers are coming back. Bad news is that means the big slow categories are carrying most of the upward momentum.
• I guess looking at the chart, I probably shouldn’t get very excited about that last point.

• Of note is that Apparel was -0.75% m/m. Apparel is only 2.5% of the basket these days (yet still a major subgroup), but it is Core Goods and one of the categories that you’d expect to see a dollar effect in. Core goods y/y dropped under 10%. But still a long ways to go.

• …in that chart you can also see core services up to 4.9% y/y, which is the highest since 1991. So there’s part of the economy that’s not inflating at 40-year highs. And it’s not a small part of the economy. But, 5% isn’t exactly great news.
• Turning to Medical Care – it was +0.44% m/m, up to 3.23% y/y. Led by Hospital Services, +0.48% m/m. Still not alarming and below the price pressures we’re seeing everywhere else. Weird.

• Within food, here are some of the m/m NSA changes that people are seeing. This is why they’re yelling, Joe. Putin’s arm is long: Dairy +2.4% m/m. Meats poultry fish and eggs +1.7%. Cereals/bakery products +1%. Nonalcoholic beverages +1.4%.
• Biggest losers in core (annualized monthly rate): Jewelry/Watches -19%, Footwear -15%, Women’s/Girls’ Apparel -10%.
• Biggest winners in core (annualized monthly rate): Lodging away from home +23%, Motor Vehicle Parts and Equipment +15%, New Vehicles +15%, Car/Truck Rental +10%. Shorter list than we’ve seen in a while, anyway.
• My guess at Median CPI is not good news: 0.53% m/m is my estimate, 5.23% y/y. That’s a better sense of where the inflation pressures are. We’ll revert to something like 4.5%-5% just on y/y effects, but until the monthly Median CPI is not hitting 0.5%, we’re not out of the woods.
• There’s also this. I’d want to see core below median as a sign inflationary pressures are ebbing. In disinflationary environments tails are to the low side (so avg<median). In inflationary environment, tails to the upside (median<avg). We are still in inflationary world.

• Quick check of them there markets…whoops, it appears equity investors don’t like this number.
• By the way, for everyone thinking that rents have to stop going up because people can’t afford these levels. Again, the price level has changed. And wages are keeping up with rent increases, on average. There is no obvious sign to me that rents are overextended at all.

• Here are the four-pieces charts, and I think we’re going to see the same story in the diffusion calculations. The stickier stuff is coming along for the ride. Here is piece 1, food and energy. No surprise here. And gasoline will be back as an addition next month.

• Core goods. This is where the dollar effect, and the decline in the cost of shipping, will eventually be felt. And at some level actually is (see Apparel).

• But now we get to core services less rent of shelter. This has been inert for years until just recently. This is the second-stickiest of the four pieces.

• And rent of shelter. The stickiest. Rising, and not yet showing signs of slowing (although I think 5-6% is where it flattens out for a while). There’s just not a lot of great news here.

• Tying up one loose end here – used cars was a small drag. But look at how the y/y plunged. Again, this is because even with little change in the PRICE LEVEL of used cars the rate of change will decline.

• Couple of quick diffusion charts and then I’ll wrap up. Here is the proportion of the consumption basket that is inflating faster than 4%. It’s at 76% and actually just reached a new high. No sign of peak inflation here.

• And finally, the Enduring Investments Inflation Diffusion Index…actually declined slightly. Last few months it has rocked back and forth a little bit at a very high level. No real sign of peak inflation here either.

• Summing up. The peak y/y CPI print is now behind us, at least for now. Expect a victory lap from policymakers talking about how their policies are winning. But there’s no sign of peak inflation pressure yet.
• The core and headline numbers actually fell less than expected. And let’s face it, this month’s Core CPI figure annualizes to almost 7%.
• In fact, 6 of the last 7 core CPI numbers have been between 0.5% and 0.6%, which would annualize of course to 6%-7.2%. If that’s what we’re celebrating with “peak CPI” behind us, I guess I’ll bring the whiskey but I’m not sure I’m celebrating.
• And FWIW, the “peak” is because we dropped off 0.86% (core m/m) from April 2021. We have 0.75% to drop next month, then 0.80%. But then we see 0.31%, 0.18%, and 0.25%. In other words, apres le deluge, more deluge.
• Core CPI is likely to still be 5%-6% at year-end! The sticky categories are still accelerating, and there will be other long tails to the upside. That’s just what an inflationary environment looks like. Watch Median CPI, which will be lower but no less concerning.
• Will the Fed keep hiking raising the price of money? Probably, although I think the swagger might leave them when stocks are another 20% lower.
• Will the Fed actually decrease the QUANTITY of money, which is what matters? They can’t, because banks are not reserve-constrained any more. So it’s up to loan demand and supply, and recently loan demand has been increasing, not decreasing. Chart is source Fed, h/t DailyShot

• Bottom line, folks, is that this might be a clearing in the woods but there’s a lot of woods ahead. Eventually inflation will ebb to 4%ish, but it will take time. I don’t see 2% for quite a long time, and not until interest rates are quite a bit higher.
• Thanks for tuning in. Don’t forget to check the summary later on the blog https://mikeashton.wordpress.com , and http://inflationguy.podbean.com  where I’ll have a podcast on this later. AND tune in at 1:00ET for Inflation Guy live with@JackFarley96 on @Blockworks_

The theme of the day is that “peak inflation” means different things to different people. To economists, and policymakers, and Wall Street brokers trying to get you back into the meme stocks, “peak inflation” means “the year/year rate of inflation will decline from here.” We already knew that was happening, before this number ever showed up on screen. Yes, the drop was less than expected, but the peak is still there in March 2022!

“Peak inflation” means something different to the average consumer, who isn’t a trained economist. Consumers tend to conflate “inflation” with “high prices”, rather than rising prices. That is, they tend to confuse the level of prices with the rate of change. So the consumer hears “peak inflation is here!” and expects that prices themselves should go back to the old levels. To some extent, this version is reinforced by the price they see most often: gasoline, which goes up and down. But most prices do not go up and down. They go up more quickly, and they go up more slowly, and sometimes they stay the same. Most prices don’t go down. The average consumer, thinking he has just been promised that used car prices, meat prices, gasoline prices, and rents are going to go back down is going to be even more upset when that doesn’t happen. (This is why politicians ought to be very careful about talking about “peak inflation” as a good thing. To the average consumer, prices that go up more slowly is just less-bad than prices that go up quickly…and they think you’ve promised them something good.)

And the inflation specialist doesn’t mean either of these things when he/she says “peak inflation.” The inflation specialist is looking at pressures, and whether those pressures are increasing, abating, or staying the same. For now, those pressures are staying about the same, with m/m core and median CPI in basically the same range they have been in for 6 months. There is not yet any sign that those pressures are ebbing. Yes, they are ebbing in some items, such as in Used Cars, and in some goods where supply chains are clearing (at higher prices). In general, we would expect goods and services which have reached a new equilibrium price level to stop going up so fast. But those are just the goods and services that moved first. With 40% more money and an economy that’s only 5% or 10% bigger, we should expect prices to eventually rise about 30%. Some more, some less, of course, and if money velocity stays down forever then it will be 20% and not 30%. But this is the point. Peak inflation does not mean peak prices. Prices continue to rise at a rapid rate, and there is as yet no sign that the pressure to do so is ebbing.