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, possibly, mea culpa day.
• Last month I, & most everyone else, said the CPI peak was behind us as it dropped from 8.5% to 8.3%. In fact, I went out of my way to be sure people understand that peak CPI doesn’t mean peak PRICES (see my podcast at https://inflationguy.podbean.com/e/ep-28-this-month-s-cpi-report-peak-changes-not-peak-prices/ , e.g.)
• We may have been premature. Today, while the consensus estimate is that headline will print 8.3% y/y the interbank market is exchanging that risk at 8.48%. And moreover, prices in the interbank market have the best guesses for headline CPI above 8.6% until October.
• Of course that is because gasoline prices did NOT peak and kept on climbing. The national average is about to surpass $5/gallon. And this is keeping headline inflation bid.

• Core CPI is still very likely to decline y/y. Consensus for the m/m is 0.5%, and the comp from May 2021 is +0.75%, so core should drop. The m/m consensus seems a little low, but 6 of the last 7 core prints have been between +0.5% and +0.6% so we are probably talking shading.
• And I focus on Median CPI, which is still rising. It will keep going up for at least a few more months. And this is the salient point. Median is the best measure of the main thrust of the distribution – and while it’s rising, you can’t say price pressures have peaked yet.

• 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 https://inflationguy.podbean.com . And all of that also will be linked on the Inflation Guy mobile app.
• In the bad news category this month, new cars and apparel are likely to continue to be contributors. Used cars are a little less clear. But these are three of the big “core goods”. So it isn’t just used cars. It was never just used cars, of course. That was just a foil.

• Also in the bad news category for the general inflation outlook (although not for this month’s CPI perhaps) is that wages are still accelerating. The Atlanta Fed Wage Growth Tracker is now up at 6.1% y/y.
• The good news is those wages are maintaining a steady spread over median CPI. Bad news is that so far gasoline and food aren’t mean-reverting and so the wage slaves of the world (and that’s most of us) are still getting killed. But maybe apres le deluge things will be better.

• Hey, more good news is that M2 is decelerating. It’s down to 8% y/y, and only 1-2% over the last 3 months. Problem is that prices still haven’t caught up with the money growth SO FAR, but at least maybe we’re stopping the digging of the hole. Early to say that yet.

• Unfortunately, commercial bank credit is growing at 9.5% y/y. Which is exactly what you would expect when non-reserve-constrained banks are able to lend at higher market rates.

• This is one of the mechanisms for velocity rising when rates go up: the supply of credit gets better, and the demand for credit is fairly inelastic (50bps means more to your bank than it does to you).
• We have never ever tried to restrain inflation with rates alone. Repeat that to yourself: monetary policymakers have NEVER tried to restrain inflation anything like this level with just interest rates. In the past, they restricted reserves. Not this time. So, here’s hoping.
• Pretty short walk-up today but that’s because all the stories are the same: rents, and breadth, and we are still looking for a peak. Rents still look strong, breadth is still wide, and the peak in headline and median appears to still be ahead.
• Question to ponder is: if CPI hits a new high, how bad for equities is that? If inflation stays at 6% for 2022, how long can the Fed sell the idea that 2.75% is the highest they’ll need to hike? The Eurodollar curve doesn’t believe it, but it also thinks this is all over in 2023.

• I’m still thinking the Fed will pause the first time stocks get sloppy or unemployment starts to rise, but maybe I’m wrong. So far no signs of that. Still, they’ve not been tested yet.
• OK, number in a few. Good luck.

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• ok, well…I guess we weren’t at peak CPI yet. M/M headline +1%; Y/Y up to 8.6%. Core slipped, but not as far as expected. To 6.01%. The decline is base effects. Bad news is that this is the HIGHEST m/m core CPI since last June.

• It wasn’t just gasoline helping the headline to new highs; Food & Beverages was +1.13% m/m, now up to +9.73% y/y. Again, that hurts the wage earners most.
• Used Cars was +1.8% m/m. New cars +0.96% m/m. Airfares, after +19% last month, were +12.6% this month. And can I say, the quality of air travel is as bad as I can remember it, speaking anecdotally.
• Remember how everyone said that when core goods inflation came down, this would pass? Well, it is! core goods fell to 8.5% y/y from 9.7%. But core services jumped to 5.2% from 4.9%.

• Owners’ Equivalent Rent leapt +0.6% m/m and now at 5.1% y/y. Primary Rents +0.63%. I have to look back and see the last time we saw any m/m jump that big. Lodging Away From Home +0.9%. So Housing subcategory was +0.85% m/m, +6.9% y/y.
• That was the biggest m/m change in OER since 1990. And it doesn’t look like it’s rolling over.

• Doctors’ Services fell -0.14% m/m, and are at only +1.1% y/y. Amazing. Hospital Services +0.46% m/m, so y/y went to 3.87%. Overall Medical Care subcategory was +0.4% m/m, to 3.74% y/y.
• Core inflation ex-housing declined to 6.4% y/y. Yay!
• This is kind of what I was afraid of. Housing inflation is moving above our model. It’s more in line with one of the subcomponents of the model, which is income-driven. And since wage income is still rising rapidly, there’s no reason to expect rents to slow very much.

• More good news is that alcoholic beverages inflation is only +4.04% y/y. We’re gonna need it.
• Household energy was +3.96% m/m. Fuel Oil +11% on the month, +76% y/y. Piped gas +7.8% m/m, +30.2% y/y. Electricity +1.9% m/m, +12% y/y. Break out those sweaters.
• (That was an allusion to Jimmy Carter telling folks to turn down the thermostat and wear a sweater, in the 1970s energy crisis).
• So Communication was -3.5% on the month. No idea what that is all about. Misc Personal Services was -1.3% m/m. Tenants and Household Insurance -0.8% m/m. Without that 5% of the basket declining, this would have been WORSE.
• Median also looks like it should be 0.63% m/m or so. If true, that would be the biggest median since 1982. And folks…pressures aren’t ebbing; they’re BUILDING. Core highest in a year (m/m); median highest in decades.

• About 8% of the consumption basket inflated faster than 9% annualized this month (m/m * 12, not y/y). That’s ridiculous. Normally there are a handful of outliers.
• Four Pieces charts. Food and Energy, no surprises.

• Piece 2, core goods. Like I said, good news. Dollar strength doesn’t hurt, but this ebbing is mostly due probably to declining trucking/shipping. Still not exactly soothing.

• Piece 3 is core services less rent of shelter. Highest in a very long time. Over the last few years, this has persistently been the one spot that was showing gradual disinflation. No more.

• Piece 4 rent of shelter – I’ve already discussed. It’s taking the top off my model.

• As predicted, stocks not loving this. Short end of the Treasury curve also less than pleased.
• I forgot: CPI for baby food unchanged on the month, +12.75% y/y.
• One more chart and then I want to wrap up. The Enduring Investments Inflation Diffusion Index declined slightly this month, but still at a very high level. Those few weird negative categories might have rounded its edges a little. Nothing soothing though.

• So, look. This was worse than even the pessimists were looking for. Housing accelerating to new levels, as a slow-moving category, is really, really bad news.
• Headline inflation, thanks to continued rises in gasoline prices, may advance still further. Core inflation was down, and may be down again next month, but ONLY because of really rough comps. May-2021 (dropped off today) was +0.75%. June was +0.80%.
• But then July, August, and September 2021, on core CPI, were +0.31%, 0.18%, and 0.26%. We’re going to shatter that. So core CPI probably doesn’t really peak until September…at best.
• Meanwhile, Median CPI is still rising, months away from a peak also, and more importantly still setting new highs in m/m prints. That’s amazingly bad news.
• We all know the Fed is behind the curve. And we know that their 2.75% terminal dot was based on the assumption that inflation would ebb to a level they think is the natural equilibrium around 2.25%.
• That ain’t gonna happen. Now, that doesn’t mean they’ll hike rates to where they really need to be, but the choice between saving the nation from inflation on the one hand and saving the stock market on the other hand just got real.
• Remember this chart. All of the models the Fed is using assume the canopener. They assume inflation is pulled by anchored expectations or some other potion to 2.25%. This is false.
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• What am I saying? DEFEND YOUR MONEY. That’s all for today. You can catch this summary on https://mikeashton.wordpress.com later, and I’ll drop a podcast tonight. Stop by Enduring Investments if you feel so inclined. Thanks for tuning in.

Maybe we will look back on this day and say “that’s the day that everyone caught on that this inflation isn’t going to just gently fade away.” Every crisis has an inflection point where suddenly everyone realizes they’re on the wrong side of the boat – the day that our assumptions up to that point became plainly and obviously wrong. In the global financial crisis, the day that Lehman failed (without being merged into some other firm like Bear was) was the day when the last sleeping people woke up.

This isn’t quite so dramatic, but banks aren’t failing so it is what we have.

So, peak CPI isn’t yet behind us. Some of that is gasoline, of course. But the core CPI figures were also stronger-than-expected, and the strongest month in a year. Median CPI is still getting stronger every month, with new m/m records every month and y/y still rising. Rents are still accelerating. So not only are prices still rising, but inflationary pressures appear to still be rising even though in some cases (notably in core goods) there are some signs of improvement.

Those pressures should eventually ebb, if money supply growth remains flattish as it has over the last few months. But the price level has not yet caught up with prior increases in the money supply. Even after the microwave is turned off, the kernels in the popcorn bag still pop for a little while. That’s the best case at this point – that we are witnessing the final kernel pops.