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Inflation Guy’s CPI Summary (Apr 2024)
The CPI for April came in pretty close to expectations. CPI came in at 0.31% m/m, and 0.29% on core, versus a priori expectations for 0.37% and 0.30%. This relative accuracy does not necessarily mean that economists now know exactly what is going on in this index, only that all of the misses canceled out. But the misses are interesting, and worth looking at, and we will do that here. Ultimately, reports like this mostly create an opportunity for framing the debate on whichever side you are on. But to my mind, this report does not meaningfully move the ball towards ‘price stability’ and leaves the Fed – if they’re being honest – still in a bind between slowing growth and sticky inflation.
Not all parts of the CPI were sticky, and that’s the point here. Actually, that has been the point for quite a while, but it was very stark in today’s report. Here’s the distribution of y/y changes in bottom-level components in the CPI. Today, the left hand stuff got lefter, the right-hand stuff got a little righter, and the middle stuff stayed about the same.
I don’t usually lead with the distribution, but it is important to keep this in mind. Inflation is not, especially at lowish levels (say, less than 5-8%), a smooth process. I used to liken this to the process of popcorn popping in a bag; the bag inflates but not because all of the kernels popped at once. The good news is that the popping is slowing, as the Fed has removed some of the heat from the bag, but the pops are still happening.
Now, here’s the good news. Thanks to core CPI being on target, the 3-month, 6-month, 9-month (well, never mind that one), and 12-month averages all decelerated.
Median inflation won’t be out for a couple of hours, but my estimate this month is 0.348% m/m, essentially unchanged from last month. That’s sort of the bad news – the y/y median CPI should be stable this month at 4.5%.
So, I think the bold type for the top line is this: inflation is decelerating, but slowly, and in a sticky fashion. The markets loved that answer and stocks and bonds leapt on the report. But that’s all framing. The debate coming into today was never about whether inflation was declining – it has been, for a while, and is expected to (even by me, and I’m on the high side of Street expectations by a fair amount) until at least Q3 and probably into Q4. That wasn’t the question – we have known since the middle of last year that 2024 would see decelerating inflation. The question is whether the deceleration will continue after that, and whether it is decelerating to 3.75%-4.25% or 1.75%-2.25%. There is as yet no sign of the latter and all signs still point to the former, because the sticky stuff is not yet unstuck.
And that continues to boil down to this: deceleration is still being driven by core goods, and resistance to that deceleration by core services.
Core goods fell to -1.3% y/y this month. I have been saying that we’ve squeezed about all we can out of core goods, and then it drops from -0.7% to -1.3%, the lowest y/y figure in 20 years! This happened even though Apparel rose 1.2% m/m. As usual, the main culprits were autos with Used Cars -1.38% m/m after -1.11% last month, and New Cars -0.45% m/m. Ironically, I think the continued softness in autos is due partly to the continued rise in motor vehicle insurance costs (which were +1.4% m/m again). We hear a lot about the affordability of housing, but you gotta have housing. You don’t gotta update your car.
The softness in core goods is welcome, naturally, but that’s the volatile part of CPI. And such low levels are only sustainable if the dollar continues to strengthen.
On the other hand, core services only softened to 5.3% y/y from 5.4%. A lot of that is housing, with OER +0.42% m/m (was +0.44% last month) and Primary Rents slowing to 0.35% from 0.41%. But outside that, ‘super core’ (core services less rent of shelter) is actually still bouncing higher. It’s 4.91% y/y – below the 6.5% it got to in late 2022, but well above the lows from October (3.75%).
Some people will like the fact that the m/m Supercore was “only” 0.42% or so, which is down from recent months. But that’s a little deceiving. Airfares were -0.81% m/m, car/truck rental -4.6%, and the monthly health insurance bump has run its course and is back to a more normal m/m change (positive, but at a 3.5% annualized rate). Longer-term, we still have to worry about the continued acceleration in, say, hospital services, which is +7.7% y/y. I pointed this out last month, and the picture is no prettier this month.
One other comment/update on rents. It is proceeding according to expectations, although I expect a slightly faster rate of deceleration for the next quarter or so. But then, all the signs are that rents are going to re-accelerate. Even those terrible indicators that inflation dummies (this includes Yellen and most of the Fed) relied on to forecast that rents would be in deflation this year…even those indicators are showing a bounce to come. Home prices are accelerating again. And none of this is surprising given that landlords are facing higher costs and increasing demand (6 million immigrants need roofs). And this is why the inflation dummies are inflation dummies – there was never, never, a good argument for why rents should be in free fall, if you just spent 10 minutes talking to an actual landlord. Get your heads out of your models and look around occasionally, dummies.
Okay, so that was a little strident but I am getting a little tired of asking potential clients how they are addressing inflation and hearing them tell me about their economist. Inflation hedging ≠ economists. Come on, people.
Let’s take this around to what we care about, and that’s policy. The Administration is trying to help the inflation figures by delaying the refilling of the Strategic Petroleum Reserve if prices go up, but is also implementing new tariffs on Chinese goods. That answers the first WWJD question (what will Joe do) – in an election year, actions which cause inflation next year are fine…just not anything which causes inflation this year. The other WWJD question (what will Jerome do) is still interesting. Growth is indeed slowing, and has been slowing for some time. Consumers are looking a bit tired, and unemployment is rising slowly. But inflation is not behaving. Median inflation won’t get below 4% until September at the earliest, and even optimistically won’t get to 3% before it starts to bounce. Before, the Fed could pretend that the new rent indicators showing widespread deflation gave it some latitude to move before the rent decreases actually arrived, but that isn’t a plausible argument any more.
However, the FOMC has started to lean more dovish. The significant decrease in the rate of taper that was announced at the last meeting clearly shows which way they are leaning. The case for a rate cut later in the summer (absent some financial crack-up that needs to be addressed) would be based on the Committee members’ sense that the current policy rate is above neutral and can be moved back towards neutral as the risks become ‘more balanced.’ Additionally, doves could argue that they don’t want to be seen easing right before the election so an ease at the end of July is a ‘down payment’ on looser policy later. The inflation data don’t support that, but the Fed doesn’t care only about inflation data. If I was on the Committee, I would not vote to loosen the taper or lower rates, but I would not be surprised to see a token ease at the end-of-July meeting. It would be cavalier, and possibly political, and not supported by the data we currently have in hand…but it wouldn’t surprise me.
One final administrative notice to those of you who subscribe to the Quarterly Inflation Outlook. The Q2 issue is expected to be published this Sunday, so look for it! (And subscribe, if you haven’t).
Inflation Guy’s CPI Summary (Mar 2024)
After a week when the NY/NJ area saw an earthquake, an eclipse, and a gorgeous 75-degree spring day, it is time to get back to work.
Today’s CPI report was not expected to be particularly great. In fact, one of the biggest conundrums of market behavior recently has been the question of why investors seemed to remain very confident that the Fed will cut rates several times this year, even as forecasts for the path of inflation have backed off of what they were last year (when most forecasters had core CPI returning placidly and obediently to the neighborhood of 2% this year). The a priori consensus forecasts for today’s CPI figure were +0.28% m/m on core and +0.33% m/m on headline. The Kalshi market was in line with that, although CPI swaps were a touch lower on headline at +0.29% (seasonally adjusted, but CPI swaps trade NSA CPI). That’s not wonderful: 0.28% on core would annualize to 3.4% y/y.
The assumption has been that even if in March we are annualizing to 3.4%, the coming deceleration in rents will push everything back down to where it needs to be. The problem with this has always been (a) the strongly-held belief that rents would slip into deflation this year were never based on good analysis, and more importantly (b) this assumed that nothing unforeseen would happen in the other direction. It is characteristic of inflationary periods, of course, that bad things happen on the upside. So this was always sort of assuming a can opener,[1] but at least forecasts for the current data were reflecting that these things had not happened yet. To be fair, the consensus on core has been low relative to the actual print for four months in a row, but at least folks are forecasting mid-3s, rather than 2.0.
Now, let’s review one other thing before we look at some charts. The recent story boils down to this: sticky rents, sticky wages. While core goods has been pulling down core inflation, that game was running out of room. The next part of core deceleration relies on un-sticking the sticky rents, and sticky wages.
So here we are. Today’s figure +0.36% on core CPI, +0.38% on headline (seasonally adjusted on both). This makes the last 3 core CPIs 0.39%, 0.36%, and 0.36%. The chart below of the m/m core CPI figures does not really give the impression of a decelerating trend.
We always look these days first at rents, because that is so important to the disinflation story. Rent of Primary Residence was +0.41% m/m, down from 0.46% last month. Owners’ Equivalent Rent was steady, at +0.44%. Remember that there had been some alarm two months ago, when OER for January jumped to 0.56%, that this was due to a new survey method or coverage and it was going to be repeated going forward. That was always pretty unlikely, but now we have had two months basically back at the old level and the January figure appears to be an outlier. 0.41% on Primary and 0.44% on OER is not hot, just sticky. It isn’t going up; it’s just not going down very fast.
Rents will continue to decline. But the failure of rents to slip into deflation is a source…maybe the source…of the big forecast error made by economists about 2024 CPI. Our cost-based model for primary rents, which never got even vaguely close to deflation, has now definitively hooked higher with the low coming in November. Rents haven’t been decelerating as fast as our model had them, but if anything that’s a source for concern on the high side.
Outside of rents, core inflation ex-housing rose to 2.38% y/y. That sounds like “most of the economy is on target,” but that’s not how inflation works. There’s a distribution, and if the ‘rents’ part of the distribution is going to be higher than the target then everything else needs to average something below the target. We aren’t there. And, as I noted above, we’ve squeezed out just about everything we can from core goods. Actually, y/y core goods dropped to -0.7% thanks partly to continued declines in Used Cars (-1.1% m/m) and some decline this month in New Cars (-0.2%). I think the latter might partially reflect discounts on the EV part of the fleet, where cars for sale have been piling up as manufacturers under political pressure have been producing far more of them than people want.
Note that core services, even with the decline in y/y rents, moved higher this month to 5.4% from 5.2% y/y. Some of that was medical care, which was +0.49% m/m driven by another jump (+0.98% m/m) in Hospital Services. The y/y rise in Hospital Services is now up to 7.55% – the highest since October 2010.
Partly driven by hospital services, the ‘super core’ (core services ex-rents) continues to re-accelerate.
Again, this is not what the Fed wanted to see; and it’s driven partly by the stickiness in wages. The Atlanta Fed’s Wage Growth Tracker has decelerated but is still at 5.0% y/y. That’s not the stuff that 2% core inflation is made of.
Let’s take one moment to look at a piece of good news from the report. My estimate of median CPI, which is my forecast variable because it is not subject to outliers like Core CPI, is +0.32% for this month. Because I have to estimate seasonals for the regional housing numbers, actual Median might be a teensy bit higher or lower but in any event the chart of Median CPI is much less alarming than the chart of Core CPI.
I should observe that the news there is not completely good, since a signature of inflationary environments is that tails are to the upside – that is, core is persistently above median. That was true during the upswing, but during the moderation core has gone back below median. But this bears watching, and if core starts to routinely print above median it will be a negative sign. For now, though, the Median CPI is good news. Relatively.
So let’s talk policy.
The Administration always seems to be confused about why, despite strong jobs numbers, consumers consistently report dissatisfaction with the economic situation. There really shouldn’t be any confusion. Consumers, especially those not in the upper classes, hate taxes. And in addition to a high direct take from the government in explicit taxes, consumers are also facing persistent inflation that the Administration says isn’t there. Inflation is a tax, and it sucks worse than direct taxation because you can’t rearrange your consumption very well to avoid it. (You can rearrange your investment portfolio, but a strikingly small number of people seem to have actually done that even three years into this inflation episode. If you’re curious about how, you really should visit Enduring Investments and ask.)
On the other question of policy, and that’s the Fed: I can’t see any rational argument for cutting rates in June. Actually, on the data we have in hand I can’t see an argument for cutting rates in 2024, except for the one the Fed doesn’t consider and that’s that interest rates don’t affect inflation. To cut the overnight rate, the Fed would have to rely on forecasts that inflation is going to get better. And to do that now, when forecasts have been persistently wrong (and not by just a little bit but about the whole trajectory) since 2020, would be incredibly cavalier. The FOMC still consists of human beings, so never say never. And the inflation data should improve as the year goes along and rents moderate. I just don’t see any sign that it’s going to moderate enough to say ‘we’ve reached price stability.’ Sticky in the high-3s, low-4s is still where I think we’re coming out of this.
[1] A physicist, an engineer, and an economist are stranded on the desert island with nothing but a crate of canned food. “How are we going to get the food that is inside of these cans?” asked one. The physicist says “well, we could heat the cans, carefully, in a crucible we make from ocean clays. Eventually the heat will cause the can to burst and we can get the food inside.” The engineer says “that will take too long. What we need to do is take some of these coconuts, raise them up to a great height with a series of ropes I will design, and allow them to smash down onto the cans, breaking them open.” The economist says “I have a solution that is far easier than what you fellows are doing. Here is how we do this. First, assume a can opener….”
Inflation Guy’s CPI Summary (Feb 2024)
I must say that I didn’t see this one coming. Credit where credit is due, though: while Street economists were just a little low (consensus was +0.40% headline, +0.30% core), the CPI swap market at least got headline right (there being no market for core inflation CPI swaps) by pricing in +0.47%, seasonally adjusted. The actual print was +0.44% on headline CPI, and a lusty +0.36% on core. I was lower, even though I got the big pieces right. I had some tails going the wrong way. Let’s get into it.
The things which threw me were airfares and used cars. Based on declines in jet fuel, I had anticipated that airfares would be roughly -6% m/m, and I merely got the sign wrong as they were +6.6%. Jet fuel was tighter on the east coast, and I suspect regional differences there is what caused this wide divergence. If I’m right, then airfares will underperform jet fuel over the next few months. If, instead, it’s a cost-of-labor or cost-of-equipment thing, or if it’s increased pricing power from airlines because of capacity constraints, then airfares won’t drop back and that would be a bad sign.
Similarly, Used Cars continues to outperform the Black Book survey. I had penciled in -1%, and Kalshi markets were around -1.5%, but Used Car CPI came in +0.5%. This is a volatile series, and this miss is only interesting because Used Cars keeps missing a little high compared to the Black Book survey. That could be an issue of sample mix, but I’m not sure. New Cars were -0.10% m/m. Car and Truck Rental was +3.83% after -0.74% last month, so that’s another upper tail. Overall, core goods was steady at -0.3% y/y.
I said I got the big pieces right. I refer to rents. Remember that last month we had a large deviation between Owners’ Equivalent Rent (OER) and Rent of Primary Residence. Normally, these two track pretty closely, but occasionally they deviate and last month OER was 0.2% higher than Primary Rents. That contributed to the very high median CPI in January, and there was a ton of discussion about whether the BLS had done something weird with the survey – they had, in January 2023, refined the OER weighting method and there was concern that this was a ‘mix’ problem that was going to continue to push OER higher than Primary Rents for a while. The BLS contributed to this sense of confusion by sending out a blast email which seemed to suggest it was so; they had to walk that back and to their credit did a very nice webinar and has spent a lot of time this month explaining in excruciating detail how the OER survey is conducted. Bottom line: there’s nothing to see here; sometimes the two series diverge slightly. Moreover, as I’ve pointed out previously, when natural gas prices are declining it tends to mean that the cost of imputed utilities is declining which, since they’re deducted from the rental survey used for OER means OER should be slightly higher than Primary Rents over time. Not 0.2% per month, though, and I expected this aberration would mostly close this month.
It did, with OER +0.44% m/m (was +0.56% last month) and Primary Rents +0.46% m/m (was +0.36% last month). Year over year, they’re about the same but OER has moved slightly above Primary.
So the surprising part to me was that Primary came up some to help close that gap, not that the gap closed. I continue to expect rents to decelerate, along with everyone else – only, as I will keep saying until I am blue in the face, we are not going to go into rent deflation as so many people have been forecasting (folks seem to be backing off that now!) but rather we should drop into the 2%-3% range y/y before rebounding later this year.
There seems to be evidence of that in the independent rent measures. Below is a chart from a recent Redfin news release. It bears noting, of course, that these rent measures also all went into deflation and misled all of those economists who lean on these high-frequency-but-low-quality data. (Having said that, Redfin does seem to be better than some others, but it’s still measuring something different than what the CPI is measuring).
Now, the story starts to become a little clearer, albeit concerning. Core services rose to 5.4% y/y from 5.2% y/y, while core goods was unchanged as I noted above. Rents are coming down, but outside of rents we are seeing some stabilization at higher-than-pre-COVID levels. The chart below shows Shelter CPI, and Core CPI ex-Shelter, which has been roughly stable for three months around 2.25%. That sounds great, since 2.25% on CPI is roughly equivalent to 2% on the Fed’s PCE target…except that 2.25% is higher than it was pre-COVID. The theme, and we’re seeing it in several places, is inflation being sticky at higher levels than it was pre-crisis.
There were some good parts to the report – notably Food, which was tame m/m for both Food at Home (-0.03% m/m versus +0.37% last month) and Food Away from Home (+0.10%, was +0.47%), although the latter is probably not sustainable given rapidly-rising wages. Still, it’s positive. Unless you’re buying baby food, which is +9.2% y/y!
Actually, babies got a lot more expensive this month. The largest increase in the categories used for Median CPI was Infant/Toddler Apparel. In general, apparel categories were right-tail items this month. But there were not enough of them to explain the high core CPI. Median was +0.39% (my estimate); since that’s right in line with core it says the tails weren’t what moved this number. It’s just that this month, inflation rose at something like a 4.25%-4.75% annualized pace.
With this, and with Core Services ex-shelter (“Supercore”) at +0.47% m/m – which means supercore accelerated to +4.3% y/y – it is inconceivable that the Fed will yet consider cutting rates. It is possible that they may later in the year, but there is far too much exuberance in the bond market about that prospect.
Indeed, there’s far too much exuberance generally. Stocks rose on an inflation report showing that inflation was higher than expected. I’m not saying that equities should crash on this data, but that’s the sort of reaction that you tend to see in bubbles. The market will be semi reserved going into an economic report, but then rallies afterwards regardless of the data. I have seen that sort of environment, where such a thing happened regularly, a couple of times in my career and they never ended well. To jump on this data, as if it was in any way positive, says that people were just waiting until after the number to buy, and they were going to buy no matter what. That’s not a healthy market, especially when that happens at high prices rather than low prices.
I continue to expect median inflation to decline to the high-3s, low-4s, maybe dipping a little lower than that in Q3 if rents bottom then as I expect. The bottom line is that we’re near levels where I have been expecting inflation to get sticky, and it seems to be happening. I didn’t see this particular month being sticky, but the general tenor of the data makes sense to me.
Inflation Guy’s CPI Summary (Jan 2024)
This is the reason that serious people don’t choose a trend length that happens to fit with their narrative. For the last few months, supposedly-serious economists have crowed about how the 3-month average of seasonally-adjusted CPI was at a new post-COVID low. (Most of those same economists, only a few months ago, were focused on the 6-month average, but when that started crawling higher they switched to the 3-month average.) And indeed, it was exciting. Headline CPI was down to 1.89% on a seasonally-adjusted-three-month-average; core CPI was at 3.30%. Victory over inflation was proclaimed! Inflation was back at target, even a bit below, so the Fed should start easing policy forthwith.
Fortunately, and maybe surprisingly, Chairman Powell is built of stronger stuff.
As a ‘Cliff’s Notes’ guide to what you’re going to read: all of those folks who loved the 3-month average when it was 1.89%, aren’t going to be as vocal about it now that it’s at 2.80%. Core, on a 3-month average basis, is at 3.92%. The 6-month averages also rose.
Now, this doesn’t mean that inflation is necessarily headed back higher yet. I’ll get to that in a bit, but I will allow as how the picture of m/m core CPI, below, might be perceived by some as discouraging.
Prior to this figure, consensus was for a fairly strong report, 0.16% on headline and 0.28% on core. I thought it would be softer, because rents on the basis of my model should start to decelerate soon. But, as I said in my podcast, if rents were high then you should look past rents. They’re going to decelerate over the next 6 months or so, to around 3% y/y, and then re-accelerate. That’s all baked in the cake, and it will flatter the inflation data. But it hasn’t happened yet! OER was a massive +0.56% m/m. Primary Rents were more in line with what I was looking for, with a small deceleration to +0.36% m/m from +0.39% last month. The indices are still decelerating…just not as rapidly as I think anyone (myself included now!) expected.
Lodging Away from Home was +1.78%, which was a big m/m figure and contributed to the overall housing subindex being +0.62% m/m at a time when shelter should be decelerating.
But as I said, if this surprise was all OER then we can look past it.
Core Goods was weak, which was a downside surprise. Used Cars fell -3.37% m/m, which is far worse than any surveys saw this month…but as I pointed out last month, Used Cars had been surprisingly strong compared to the private surveys so this is partly a make-up and it contributed to the weakness in Core Goods.
Medicinal Drugs was also weak, -0.54% m/m, and that’s also in Core Goods. Overall, Core Goods – which had shown some signs of life – dropped back to deflation y/y this month.
Going forward, I don’t think core goods will stay in deflation. Partly, that’s because supply chains are being stressed again due to drought in the Panama Canal and the effective shutting of the Red Sea to container traffic, but it’s also partly because there is continued interest in ‘nearshoring’ which will raise costs (after all, it was to lower costs that firms offshored stuff in the first place. And then there’s also this, for the medium term. To be sure, this level of growth in Personal Consumption in the past was consistent with mild deflation – but that was pre-nearshoring. The direction is what I’m interested in, but I also think that for a given amount of PCE growth, we will see more core goods inflation in the future.
So now we turn to the really interesting part of the report, and that’s core services ex-shelter. I’ve been saying for a while that this category was going to be a sticky wicket because wages are still rising at a 5% y/y pace. And indeed, the wicket is sticky. This month, airfares rose +1.4% (this may have been related to jet fuel tightness on the east coast), but also again we saw a continued acceleration to Hospital Services, which rose to the highest y/y rate (+6.7%) since 2011.
Overall, core services ex-shelter (so-called “Supercore”) rose +0.85% m/m, the biggest rise in a couple of years, and the y/y measure is in an upswing.
Overall, this report is deflating…pun absolutely, 100% intended…for those who thought that inflation is settling gently back to target and that the Fed therefore can lower interest rates back to where we have a God-Given Right to have them, 2% or so. Not so fast! Median, by the way, was also a scintillating +0.53% m/m, the highest since last February. Thanks to base effects, the y/y Median CPI was essentially flat, at 4.90% y/y.
Because of the deceleration in housing I expect, I continue to see Median slowing to the high-3s, low-4s over the middle of this year. But it is going to have a hard time getting lower than that. In the short-term, we have saucy performance from core services ex-shelter. In the short- and medium-term, core goods is going to get out of deflation (although I don’t expect it to rise very far). And then housing should re-accelerate, though not back to the old highs. In short, inflation is a long way from being beaten. I am sure that somehow, that’s bullish for stonks, but I can’t figure out why. (I hear the 3-month moving average of the last four months of CPI, dropping the highest month, looks good.)
Inflation Guy’s CPI Summary (Dec 2023)
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I’m changing the way I do the monthly CPI analysis. Doing it live for an audience was always stressful, especially with the inevitable data issues from time to time. Of course, as an inflation investor/trader I’ll still do it live; I just don’t have an audience. The nice part about doing it live was that the monthly report had a very similar structure to it with the same charts all of the time, and that will change. But it also means that I can lead with the important stuff sometimes, like this month. So I’m going to start today’s discussion of the slightly above-consensus CPI report (+0.31% on core, vs expectations for +0.25%) by saying the quiet part out loud:
Rents aren’t collapsing. They are decelerating, and they will continue to do so, but they are not going into deflation. Everyone today seems to be acting as if this is some huge shock, but it really isn’t. The only reason to ever have thought there would be rental deflation in an environment of housing shortage was that some of the high-frequency rent indices (which are not designed to be high-quality data; they’re data derived from a business that have been packaged as if it is high-quality data) suggested declines in rents, and an influential article – I talked about it in episode 74 of the Inflation Guy podcast – popularized the notion that you could get more information from the BLS by looking at less data. But the cost side has never improved for landlords – in fact, it keeps getting worse – so it was hard to see how there would be a general decline in rents. In some parts of the country, from which people are migrating away, e.g. perhaps inner cities, rents may fall. But those people have to go somewhere. Big migration means the housing stock is now all in the wrong places, and rents go up when there’s a shortage faster than they fall when there’s a glut.
Anyway, both my costs-based rents model above and my old rents model below suggest the same destination for rents – middle of this year or just afterwards, y/y rents should get to around 2-3%. That’s a lot lower than the current run rate for rents, of +0.47% m/m for OER and +0.42% for Primary rents this month, but it’s also far above what the general expectation has been for this large part of the consumption basket. Moreover, it appears that the longer-term pressures are for that part of inflation to scoop back higher, not lower.
So, today’s rents number was a little surprising, but not that surprising. Some are attributing the miss today to ‘just rents,’ as if it’s okay for the largest part of the CPI to have a trajectory that’s confounding many forecasts, but it wasn’t just rents. Median inflation was +0.42% m/m, keeping the y/y number above 5%. And three of the last four figures have been in that zone. Median should keep decelerating too, but it is not collapsing.
Now, I’ll note that Used Car prices were weird, again. They rose +0.49% m/m, when I (and most folks) had expected a decline. They’ve been a bit squirrelly for a while, with official inflation printing higher than the private surveys fairly persistently for 6-9 months. But on the other hand, airline fares have been persistently squirrelly lower compared to jet fuel, so these two things were ‘errors’ in the opposite direction. This month, airfares also rose, by about 1% m/m – but that was right about where it should have been given the change in fuel prices and not a surprise.
Now, the diffusion stuff is looking better, and supports the idea that median inflation will continue to decelerate.
Such a deceleration has been and continues to be my forecast. I expect median inflation to settle in the high 3%s, low 4%s, and be hard to push much below that. In the near-term, meaning maybe by early H2 of this year, we could get some numbers a little below that as the rent deceleration continues. But then the hook happens. It will be hard to get inflation below 3% for very long, especially if the Fed decides to stop shrinking its balance sheet and money supply growth recovers.
So the system is normalizing after COVID (and more relevantly, after the spastic and dramatic fiscal and monetary response to COVID). But normal is no longer sub-2%. Core services ex-shelter (so-called “supercore”) abstracts both from the deceleration in housing and the sharp drop in core goods, and it is hooking higher (this is partly because Health Insurance had been artificially depressing it and that effect is waning).
Supercore is unlikely to really plunge either. Wages remain robust. The Atlanta Fed just released its Wage Growth Tracker, at 5.2% for the fourth month in a row. The spread between median wages and median inflation, which had been stable around 1% for a long while, is heading back there (see chart). So again, we’re looking at something around 4% for median inflation unless wages start to decelerate…and there’s as yet no sign of that.
The bottom line is that while this number was only a little bit surprising, it was surprising for all the wrong reasons. There is nothing in this figure that suggests the Fed can comfortably abandon a tight-money policy and think about easing soon, and I don’t expect them to do so.
