E-piphany

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy. Sign up for email updates to my occasional articles here. Individual and institutional investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Check out the Inflation Guy podcast!

• Welcome to the #CPI #inflation walkup for October (September’s figure).
• At 8:30ET, when the data drops, I will pull down the data and then run a bunch of charts. Then I’ll comment and post some more charts. As usual. But nearing the end of this string. December is the last month I’ll do this live.
• Later, I will post a summary of these tweets at https://inflationguy.blog and then podcast a summary at inflationguy.podbean.com . Those will continue after the live tweeting stops in 2024!
• The estimates for this month’s CPI data are fairly uniform across sources in expecting 0.26% m/m core, and 0.31% or so on seasonally-adjusted headline. My forecasts are a bit higher on Core, but in-line on headline. Here’s why.

• First of all, while used car prices declined this month they fell by less than the seasonal adjustment factor would suggest. Instead of -1.9%, which is the non-seasonally-adjusted pace that Kalshi shows for its used car CPI market, I see +1.3% for the SA pace.
• However, there’s a huge amount of variance there so I am actually penciling in flat. Partly, that’s also because used car prices haven’t yet fallen as much in the CPI as the Black Book survey would project, so maybe I’m too high.
• Used car auctions in the latter half of this month were very strong, though, thanks to the strike against US auto makers. That hasn’t yet affected sales, but the auctions show it SHOULD affect prices since there is less reason to clear the lot if there are no more cars coming.
• But although used car auctions have been strong, I don’t expect CPI to LEAD the Black Book survey. CPI almost never leads.
• So if new car CPI isn’t strong this month, I expect it to be strong next month. Ditto with used cars. In fact, “if not this month, next month” will be a constant theme here.
• Same is true of airfares, which last month rose about 5% but still lag far behind jet fuel – which has continued to rise. I expect another add there. And Lodging Away from Home was a surprise decline last month, which I am expecting to reverse this month.

• Now, this month we do still have the 4bps drag from health insurance…but that reverses next month. Enjoy it while you can.
• We are coming to the end of several of these trends that have flattered the CPI (or flattened it) recently: health insurance & the drag from used cars being the big ones. Used cars still has downward pressure from rates, but the strike is more important.
• Thus, while y/y core CPI should get down to 4.1% or 4.2% this month (due also to easy comps vs 2022), getting it BELOW 4% is going to be tougher.
• One trend that will be continuing for a while is the slow (accent on slow) deceleration in shelter inflation. Last month, OER was +0.38% and Primary Rents +0.48% m/m. That was right on my model. This month I have Primary Rents at +0.40% m/m, and the combination at +0.38% m/m.
• Obviously the rent thing will continue for a while, but it won’t slow down as fast as people expect. I think that must be the reason that the consensus forecasts are soft given the obvious adds this month. So we will see.
• Interestingly, the consensus on headline is roughly where MY headline estimate is despite my higher core. That means economists see food and energy adding more than I do. I don’t see that. Gasoline was basically flat Sept/Aug. I have 1bp from energy and 1bp from food.
• Of course, with war in the Middle East – though weirdly, energy markets have been incredibly insouciant here – there is much more upside potential to energy prices going forward. And not much downside, unless growth collapses.
• And while there are plenty of people looking for a growth collapse…I don’t see that. A recession, definitely, but a deep one? One that damages the financial infrastructure? Not really. Might be long, but not deep. And with inflation as well.
• From a markets perspective, it has been a weird month in inflation. Real rates have shot up MORE than nominals, which is something you’d expect at the start of an expansion, not with recession coming on.

• Breakevens are DOWN even though overall rates are UP, in other words. It’s bizarre;as I said in my podcast last week TIPS are finally an absolute buy, not just a relative buy compared to very-expensive nominals.  https://inflationguy.podbean.com/e/ep-84-is-it-time-to-buy-tips/
• Incidentally, also take a look at the nice Q&A that Praxis did with me this week. https://lnkd.in/emCrcnHs
• And while I’m thinking about it, take a look at the new Enduring website: https://www.enduringinvestments.com
• I said last month: “I think markets recognize that the narrative is turning, from “we are in an inflationary spiral” to “inflation is coming down” to “okay now it gets harder.” And that leaves breakevens a bit aimless for now.”
• Still true…but we are further into that turning. It gets more difficult now. The Fed’s job is also getting more difficult, but we’ll wait to see what this number is before talking too much about that.
• That’s all for the (short) walkup. Good luck today!

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• We are at 0.323% on Core, and 0.396% headline, so higher than expectations. BLS made some more changes in the way they roll out the release, so I’m about 1 minute behind schedule.
• I can already see Used cars was a drag but rents a big gain as OER rebounded from last month and Lodging Away from Home bounced (as expected).
• m/m CPI: 0.396%   m/m Core CPI: 0.323%
• Last 12 core CPI figures

• OK, so looking at this…it’s a bad number but a lot of this is probably going to trade to OER. Still, June and July start to look like the aberrations they were.
• M/M, Y/Y, and prior Y/Y for 8 major subgroups

• Nothing really stands out here…Housing obviously strong.
• Core Goods: 0.0221% y/y           Core Services: 5.69% y/y

• The overall trends in core goods and services are positive. Core goods going negative y/y is lower than I think is sustainable, and it should start to turn. Although with the dollar as strong as it is, it’ll take longer than I had been expecting.
• Primary Rents: 7.41% y/y           OER: 7.08% y/y

• So you can see no big change on the y/y trends. They’re slowing, but (as I’ve said) they’re not slowing as fast as everyone seems to think they will. OER’s jump this month will get the press, but overall the trend is in line.
• Further: Primary Rents 0.49% M/M, 7.41% Y/Y (7.76% last)       OER 0.56% M/M, 7.08% Y/Y (7.32% last)       Lodging Away From Home 3.7% M/M, 7.3% Y/Y (3% last)
• However, the m/m on primary rents also are higher than my model. Remember, costs for landlords are continuing to rise – it’s hard to imagine that rents will actually decline and landlords will just accept losses. There’s new supply, but way more new demand from immigration.
• Some ‘COVID’ Categories: Airfares 0.28% M/M (4.89% Last)      Lodging Away from Home 3.65% M/M (-2.97% Last)      Used Cars/Trucks -2.53% M/M (-1.23% Last)      New Cars/Trucks 0.3% M/M (0.27% Last)
• The rise in airfares is still lower than it should be and I will expect a further increase next month. Lodging Away from Home was an expected bounce, and on par. The decline in Used cars is probably at least temporarily over thanks to the strikes – we will see it next month.
• Here is my early and automated guess at Median CPI for this month: 0.439%

• The caveat to my median estimate is that the median category is a regional OER, which I have to guess at seasonal adjustment for. But this is the highest median since February. Again, July was an obvious outlier and now it’s more obvious.
• Piece 1: Food & Energy: 1.96% y/y

• No surprise there’s a bounce in food and energy y/y this month.
• Piece 2: Core Commodities: 0.0221% y/y

• Piece 3: Core Services less Rent of Shelter: 3.56% y/y

• This includes Health Insurance…and that will reverse next month. Instead of dragging 4bps/month on core, and 10-12 on this subgroup, it’ll be adding back 2bps/month on core.
• Piece 4: Rent of Shelter: 7.2% y/y

• In the good-news category, Core ex-housing is down to 1.97% y/y. So, if you ignore housing, the Fed is at target. Except that’s largely thanks to Used Cars and Health Insurance decelerations, both of which are tapped out. As I said, it gets harder from here.
• Core Categories with the largest m/m declines (annualized): Jewelry/Watches (-27%), Used cars & Trucks (-26%), Women’s/Girls Apparel (-20%), Infants’ Toddlers’ Apparel (-18%), Motor Vehicle Parts & Equipment (-16%). This last one also is probably going to reverse due to strikes.
• Biggest annualized monthly gainers: Lodging AFH (+54%), Misc Personal Goods (+22%), Motor Vehicle Insurance (+17%), Misc Personal Services (+14%), Tenants/Household Insurance (+11%), Alcoholic Beverages (+10%).
• Further to that, Misc Personal Services was +1.1% m/m and Misc Personal Goods was +1.7%. Those only sum to one percent of the whole CPI so not a big deal. A big reason that the “Other” subindex was +0.57% m/m though.
• I have to confess a little surprise that yields and BEI aren’t up more on this. Yes, some will say it’s “just OER” and that looks like something of a makeup number…but at the VERY LEAST it should make the disinflationists question that KEY PART of their theory.
• Maybe…just maybe…rents aren’t going to collapse into deflation? I dunno, just spitballing here, but since there’s no sign of it, and home prices are rising again…a number like this ought to at least make you think about the possibility.
• OK, the response after the initial drop-and-bounce looks like people are having a think. I should say that I don’t think this changes the Fed’s trajectory – they’re done, although this brings in the chance for one more 0.25% to appease the hawks.
• But clearly, 500bps of rate hikes hasn’t done the trick so what will 25 or 50 more do? Or 200? All that will do is slow the economy, without hurting inflation. There is little to no evidence that rate hikes push inflation lower, and at this point even the hawks must be noticing.
• Running some diffusion stuff now. The story there continues to be positive. But we always knew the spike wouldn’t last forever – the question now is, where does inflation fall to? And so far, there’s no sign we’re going to plunge back to 2%. The hard part has started.

• Another diffusion chart. Slightly worse this month (this is based on y/y), but overall improving. However, again…if 55% of the CPI, or 30% + OER, are still inflating faster than 4%…you’re not back to target yet. Far from it.

• That’s enough for today. The summary is that the big surprise was rents, but outside of rents the news wasn’t so wonderful that we can ignore the fact that rents are not decelerating as fast as people expected. I continue to expect core of high 3s, low 4s for 2023. On track.
• Thanks for tuning in. Be safe out there!

I started out with the theme “if not this month, then next month,” but we can dispense with that theme. Although that can be said of Used Cars, and Airfares – both which were lower than I expected – the more accurate theme is the one I started teasing last month: “now it gets harder.”

The lion’s share of the deceleration in core goods is over with. While the dollar’s continued strength will remain a pressure on goods prices, we’re down to zero in a category that even before COVID was only deflating 1-2% per year. And in the post-COVID, de-globalizing world, we are unlikely to see core goods prices sustainably deflating.

The decline in health insurance CPI is over with. Over the last year, that declined almost 4% per month and dragged 4bps per month on core CPI. In the coming 6 months, that is going to be an add of something like 2bps per month. You were sailing with that wind but now the wind is in your face.

Energy prices, a continued drag since the Biden Administration started flushing the SPR, are no longer going to drag. Whether or not gasoline prices rise back to the level they were prior to the SPR releases, they’re not going to be headed much lower especially with war in the Middle East. While the market seems amazingly insouciant about the widening of that war – “hey, neither Israel nor Gaza produce much oil so we good” – this does not feel like prior Israeli-Palestinian conflicts to me. Recent oil inventory numbers have been volatile and confusing, but unless the US recession is sharper or deeper than I (or OPEC) expect the cartel is likely to be able to keep prices high especially in an era when the US is not producing with heartfelt enthusiasm.

Further decelerations in rent are still ahead. But none of my models have primary rents slowing to below 3%, and that’s in contrast to what seems to be a general consensus that rents will outright decline nationally. I don’t see it.

The decline in rents is a big part of why core is down to the low 4%s, and will drop further over the next year even with other things no longer dragging. But again, this is no longer about when the peak in inflation will get here – it’s about where inflation is going to decline to. From 6.6% to 4.1% was the easy part. From 4.1% to 3% is going to be difficult. From 3% to 2%? So far, I don’t see anything that gets us there.