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Restructuring the Inflation Guy Content Offering

August 2, 2022 2 comments

For many years, I’ve been producing a blog and pushing free content. Before that, I wrote Sales and Trading commentary for Natixis, and before that Barclays, and before that Deutsche Bank, and before that, Bankers Trust. I never charged for any of that and neither did the banks, at least directly.

Writing, at least with respect to the blog itself, was part of my process of thinking through the economic and investing environment. I had to do that anyway, so distributing those thoughts was easy and the feedback/pushback I got was important and useful as well. It still is.

But over the years, my content offering (which is congruent to the set of Enduring Investments’ content offering) has widened to different channels and even different media. There is now an Inflation Guy podcast, an Inflation Guy mobile app, and even an Inflation Guy album of ‘80s hits. (Okay, not that one.) I’ve written two books and am contemplating a third. And then there’s Twitter. And as the number of content outlets and offerings metastasized, it has also become clear that I have gone way beyond just the idle penning of my musings and that this takes a lot of time. Some other things I would like to do would take even more time. So there needs to be a business purpose!

The hope has always been that some people who find these thoughts useful would become investing or consulting clients of Enduring Investments. Some have! And more will, in the future. But others may want some content and be willing to pay for the value, but not be willing or able to become clients. Consequently, I’ve been discussing with a bunch of my advisors how to capture the value that people are willing to pay, but not in the single avenue we presently offer (that is, becoming a client).

So I took a survey, and many of you participated. I want to tell you that I really appreciate the answers you gave and the time you took to answer the survey. It was well worth the two Visa gift cards (which, incidentally, haven’t yet been claimed – check your spam folders, folks, as I have written to two of you who are winners!). There were some very thoughtful comments and some good ideas. There was also some humor: one person put my address in for the raffle (I didn’t win). And then there was a bot! All of a sudden, one day I received a deluge of hundreds of responses. Some of these responses indicated that Inflation Guy content was worth $50,000 per month. I am flattered, robot, but money means different things to humans I guess. Fortunately, it was easy enough to cleanse the data of bot responses, which were fairly obvious…and, in retrospect, there is probably a thriving business out there of people pouring bot responses into raffles to tilt the odds. Live and learn.

On the basis of the responses, this is what we have decided to do with “Inflation Guy/Enduring Investments” content going forward.

First of all, free stuff:

  • The E-piphany Blog, which was at https://mikeashton.wordpress.com and now can be reached at https://inflationguy.blog . It has always been free, and will remain free. You can subscribe to email alerts of the content. The monthly summary of my CPI-day tweets will continue to appear here, a couple of hours after the release.
  • Cents and Sensibility: the Inflation Guy podcast. Free wherever good podcasts are found. There may someday be advertisements but the podcast itself will remain free.
  • My weekly Investing.com column, which is unique to http://www.investing.com . They have subsidized it so that you don’t have to.
  • The Inflation Guy mobile app. While there may be “premium content” on the app, the app itself will remain free as well as will a goodly amount of its content.
  • @inflation_guy on Twitter will remain a free follow. My blog columns and podcasts and other free content will funnel through that channel. The monthly CPI tweets, though, will not (see below).

And now, the new offerings. These, and any others we add in the future, are available on the blog site at https://inflationguy.blog/shop/ . Please note that Enduring Investments clients pay nothing for these offerings.

  • Inflation Guy Plus on Twitter – Private Twitter account subscription. I am moving the real-time analysis of the CPI report to a private, subscription-only Twitter account. I will release my charts as soon as possible after the number, and will also have a private live audio broadcast as I comb through the charts and data. (I haven’t figured out whether this will be on Discord, Google meet, Zoom/Skype, but will probably start as a simple conference number). @InflGuyPlus will also have other daily/weekly charts and commentary not available on @Inflation_Guy. The cost of a monthly subscription will be $99/month with a discount for an annual subscription. This is in line with other private Twitter offerings. For example, Damped Spring offers a private Twitter feed for $80/mo with similar content though of course less concentrated on inflation. And the results of the survey we took suggested this price is not inappropriate for the people who require the real-time analysis to make trading decisions.

I do know that some people will be disappointed this isn’t cheaper. It’s an unfortunate characteristic of walls: unless there are people on both sides, you don’t need a wall. (Again, Enduring Investments clients are automatically catapulted over the wall. Although that is an unfortunate metaphor come to think of it.)

  • Quarterly Inflation Outlook – I have been writing the QIO for more than a decade now. It comes out on the ‘refunding’ cycle: February, May, August, and November, within a couple of days after the CPI reports in those months. I decided to make single-issue subscriptions available, at least for now, hoping that after trying an issue people will sign up for the discounted monthly subscription. The current issue is $80 (right now, you can buy the August issue, which will be delivered via email when it is published); the preceding issue is $70 (in this case, that is the May issue) for an immediate download; earlier issues may be made available once I have time to sort through them and find ones with staying power. To test whether there’s any demand, I listed the Feb 2022 issue for $50. I also listed the 2020Q4 QIO, in which I look prospectively at the incoming Biden/Harris Administration, for $40. A recurring subscription gets a discount to $75/issue, which seemed to be acceptable to most of the respondents to the survey.

We are going to start with those two paid offerings, and see how it goes. There seemed to be some interest in a $2.99 monthly subscription which would update your personally-weighted inflation index, and in a $20 monthly subscription to a collection of model portfolios, but we will see how the response is to these products before adding other options.

One other quick comment about the prices: being a markets person, I will be attentive to dynamics that suggest I should raise or lower the price. But for you, if the price is acceptable there is no reason to delay subscribing. That’s because if I raise the price, all existing subscribers will be grandfathered at the original price; if I lower the price, I will lower it for all existing subscribers as well. So there is no price risk to you in deciding to buy now.

Now, let me mention one final offering. This has a very narrow audience but which audience seemed, in the survey, to be enthusiastic about deeper access to Inflation Guy.

“You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I’m offering is the truth. Nothing more.”

Morpheus, The Matrix

Let’s call this “Inflation Guy Prime.” It is really for the institutional investors and traders who want regular forecast updates and detail, some relative-value metrics and possibly trading signals, subcomponent forecasts/curves, and two-way communication with the Inflation Guy. Because of the two-way communication bit, this offering is capacity-constrained and so will be capped at a yet-to-be determined number of subscribers; the price will increase as we get more subscribers who want to be “Prime.” The current price is shown on the shop.

And so now…we see what happens. Thanks again to everyone who participated in the survey and offered independent, helpful suggestions. The offering will change and hopefully improve over time. We will add other offerings for readers/investors who have different needs. And we will figure out the right price points, eventually…but we had to start somewhere. Please let me know of any questions and/or suggestions you may have!

Summary of My Post-CPI Tweets (June 2022)

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!

  • Here we go again. It’s #CPI Day. #inflation
  • Before I get started with the walkup: 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.
  • What sets apart this month from many over the last couple of years are two things.
  • First, economists are now fully in the inflation-liftoff camp, with forecasts that are starting to look more like the actual data. The consensus for Core CPI is 0.54%. The average core CPI for the last 8 months is…0.54%! Who says that Econ PhD isn’t worth the money.
  • Second, and more significantly: the market has completely erased the possibility of sticky inflation and reflects 100% confidence that the Fed will be immediately and dramatically successful in restraining inflation.
  • The interbank market is pricing in 1.2% headline CPI for this month, but a SUM of 0.3% for the next 3 months. Even if gasoline, which has recently plunged from $5/gallon to $4.66/gallon, goes to $3.50 and stays there, this implies core CPI immediately decelerating.
  • The decline in the inflation markets has been unprecedented. 1y CPI swaps have fallen more than 200bps over the last month. The real yield on the July-2023 TIPS as risen 220bps during that time. 10y breakevens are narrower by 47bps.
  • The 1y inflation swap of 3.75%, considering that core and median inflation – which move slowly – are currently rising at a 6%-7% rate, implies a massive collapse in core prices and/or gasoline.
  • And this is important to note: there is as yet almost zero sign of that. Could it happen? Sure. But the Fed just made a massive 7% screw-up on inflation. My confidence that they know exactly how to get it back to 2% is…low. And to do so quickly? Very low.
  • I mentioned earlier the consensus for core CPI is +0.54%, which would put y/y at 5.7%. The consensus for headline is +1.1% (interbank market is at 1.2%), putting y/y headline at 8.8% or 8.9%.
  • I don’t do monthly forecasts because I want you to respect me in the morning. But I will say that the SPREAD between core and headline this month seems very wide to me. Typically core vs headline is a function of gasoline prices in a pretty simple way (see chart).
  • Given where the monthlies have been trending, I think core could be a little higher than consensus and headline a little lower. But if headline surprises to the upside, I suspect that will be because core did also.
  • Rents will continue to be strong. Last month, primary rents and OER rose at >7% annualized pace, and that didn’t seem too out-of-whack. Used Cars will likely be close to flat, and we could get a drag from airfares (?). So I would shade the core forecast on the high side.
  • But unless core is a lot higher than that, 1.1% or 1.2% m/m seems a stretch.
  • Used Cars will likely be close to flat, and we could get a drag from airfares (?). So I would shade the core forecast on the high side, but I’m not hugely confident in that.
  • Later you will see a lot of headlines about that new high in y/y CPI, but core CPI will continue to slide from its recent high at 6.47% in March. But after this month, Core CPI has easy comps for the next 3 months. If we keep printing 0.5%, we’ll get a new high in September.
  • Like I said, that’s contrary to the market’s pricing at the moment.
  • As a reminder, I tend to focus on Median CPI partly for this reason – outliers in core can pollute interpretation. And the Median CPI y/y chart is unambiguous at this point: still accelerating. In fact, the m/m Median CPI is looking even more disturbing than this y/y version.
  • Which brings me to an announcement of sorts. I do all of these charts more or less manually from big spreadsheets. But this month I am trying something new with my Median estimate (the Cleveland Fed reports Median CPI around lunchtime).
  • This month I’m trying an experiment with that figure. It’s going to be produced automatically when the CPI data drops, within about 1 minute (fingers crossed). And tweeted automatically. Does that make me a bot??! If it works, I may do others of my charts.
  • The actual core and headline m/m changes will also be bot-tweeted. I hope.
  • Anyway – market reaction to this number will be very interesting. If CPI is higher than expected, I would anticipate a very negative reaction to stocks and bonds, and v.v. People will start talking about 100bps of tightening this month (I doubt we will get that though).
  • And if CPI is soft, we should get a positive reaction from nominal stocks and bonds…naturally.
  • But what of inflation markets? Traditionally, an upside surprise would be met by a rally in breakevens. However, if investors really believe the Fed is going to respond aggressively and sucessfully, with a chance of overdoing it, then breakevens may FALL with a high surprise.
  • I don’t think that would make sense, but it also doesn’t make sense for 5y breakevens to be at 2.52% with median CPI at 5.5% and rising, wages at 6.1% and rising, and rents at 5.1% and rising.
  • However, markets clear risk; they don’t forecast. The inflation markets are telling us that people believe they have far more exposure to declining prices than to rising prices, and so need to sell it. That seems nonsensical to me, but ::shrug::.
  • So it will be interesting to look at the reaction in breakevens, especially if it seems nonobvious with the number.
  • That’s all for now. Number coming up. Good luck.

  • well…the consensus got the spread right, if not the level!
  • m/m CPI: 1.32% m/m Core CPI: 0.706%
  • Here is my early and automated guess at Median CPI for this month: 0.731%
  • Hey, that worked.
  • So, Owners’ Equivalent Rent was +0.7% m/m; Primary Rents +0.78% m/m. Rents will eventually decelerate, although not decline, but this will take a while.
  • Largely as a result of rents, core services rose to 5.5% y/y; core goods fell to 7.2% y/y. Not actually good news, since services are stickier.
  • So airfares fell, -1.82% m/m after a 12.5% surge last month. Lodging away from home -2.82% m/m. Car and truck rental -2.2% m/m. But Used Cars and Trucks +1.6%; New cars and trucks +0.7%.
  • Baby food +1.1% (NSA), and 12.6% y/y. But the main plant that had been shutdown is reopening. So, we got that going for us.
  • With y/y core falling to only 5.9%, it makes it even clearer that we will hit new highs in September if not before. Especially with core services continuing to rise, the m/m figures just aren’t going to drop that fast. And the comps for the next 3 months are +0.31, +0.18, +0.26.
  • I kinda buried the lede that headline CPI rose to 9.06% y/y. However, that is going to be the high for a little while unless energy sharply and quickly reverses.
  • Babysitting the bot got me off my game a little. Forgot to post this chart of the last 12 core CPIs.
  • So, this was not the highest core CPI we have seen. We had bigger ones back in 2021. But those were driven by outliers – you know that because median CPI did NOT have those spikes. This 0.7% is much worse…it’s not from outliers.
  • In the major groups, Apparel was +0.79% m/m. medical Care was +0.67% m/m. “Other” was +0.47%. The rise in medical was broad, with Pharma (+0.38% m/m), Doctors’ Services (+0.12%), and Hospital Services (+0.26%) all contributing. Still lower than core CPI, but trending higher.
  • Core CPI ex-shelter did decline, though, to 6.1% from 6.4%. That’s good I guess?
  • 10y BEI +7bps. So remember I was concerned that an upside surprise could be met with LOWER breaks if investors really believe the Fed is in charge and is gonna go large. Well, they may go large (stocks getting killed), but inflation folks less sure they are “in charge.”
  • The median category looks to be Medical Care Services. And that bot chart actually matches my spreadsheet. It was just truncated until I clicked on it. Man, this looks ugly.
  • That would put median CPI at 5.952%, rounding up to 6%, y/y. Another record high.
  • Biggest increases in core categories were Motor Vehicle Maintenance and Repair (+27% annualized) and Motor Vehicle Insurance (+26%), both a function of rising parts and replacement costs. Used Cars/Trucks +21%. Footwear +21%. Jewelry +19%. Infants’ apparel +16%.
  • In median, the Cleveland Fed splits OER into four geographic categories. This month, “South Urban” OER was up at roughly 12.5% annualized (roughly, because I seasonally adjusted it differently than the Cleveland Fed does).
  • Biggest monthly decliners were lodging away from home -29% annualized; -23% car and truck rental. Public Transp -5%, Misc Personal Goods -4%.
  • OER at 5.5% is well above my combo model. But it’s actually a little below one component of the model, which is based on incomes. 6.1% annualized income growth means the REAL rent growth isn’t as big as it looks.
  • This is a disturbing chart. It shows Atl Fed wages minus median CPI. I’ve estimated the last point (Wages could still accelerate this month, but won’t as much as Median). For a while, the median wage was steadily ahead of inflation. No longer. That’s why cons confidence is weak.
  • Let’s do four-pieces. Piece 1. Food & energy up more than 20% over the last year. That’s the highest in many, many years. And it’s why Powell is suddenly interested in headline.
  • Piece 2: Core goods. Yay! This is the story they were all sellin’ back when we first started spiking. “Once the ports clear, inflation will collapse back.” Actually, they told ya that PRICES would collapse. That is not ever going to happen. But inflation in core goods will slow.
  • Part of the reason core goods inflation will slow is because of the persistent strength in the dollar. I don’t know that will last forever, but while it happens it will tend to pressure core goods inflation lower.
  • Piece 3, core services less rent of shelter. This is the scariest one IMO, because it has been in secular disinflation for a long long time.
  • Piece 4, rent of shelter. This is also a candidate for scariest. People keep telling me home prices and rents will collapse but there’s a massive shortage of housing and building is difficult. Real prices could fall and nominal prices still rise, and that’s what I expect. Later.
  • So, this is fun. I have run this in the past but had to shift the whole thing because most of the distribution was off the right side. So the left bar shows the sum of categories inflating less than the Fed’s 2% target. The right bar is the weight of categories inflating >10%.
  • The sum of the weights of categories inflating faster than 5% is now over 70%. This was essentially zero pre-Covid.
  • Well, I guess we can wrap this up with a look at the markets. S&P futures -60 just before the open. 10y yields +5bps. 2y yields +12bps. 10y breakevens +5bps. Actually less-severe than I’d have expected. This is an ugly number.
  • So, we keep being told tales that inflation is peaking. And it will. Surely it will. It’s just that there are things that are still going up.
  • Our problem is that we have trained our perception on a low-inflation world. When prices go up 10%, we expect them to fall back. That isn’t automatic in an inflationary world. Prices going up too fast are followed by prices still going up, but a little slower.
  • There is most definitely a wage-price feedback loop going on. The black line below is going to get to about 6% today. The red line – which is a better measure than avg hourly earnings – is not likely to fall under that pressure.
  • We are still in an inflationary world. We are still in an accelerating-inflation world. It won’t last forever. But it isn’t over yet.
  • That’s all for now. Remember to visit https://mikeashton.wordpress.com to get the tweet summary later. Try the free Inflation Guy mobile app to get lots of inflation content. Check out the Inflation Guy podcast. https://inflationguy.podbean.com Like, click, retweet, etc. Thanks for tuning in!

Okay, to be sure I have long been in the camp that inflation would go higher, and remain stickier, than most people thought. The early spikes in inflation, due to used cars, were to me a harbinger and not a one-off. This is not, and never has been, primarily a supply-side problem. Today’s inflation did not start on the supply-side. The shortages were caused by a sudden resurgence in demand, and that demand was entirely artificial. It was that demand that created the shortages. To call this a ‘supply side problem’ is either ignorant or disingenuous. In some rare cases, supply was permanently impaired. Refinery capacity, for example. But in most cases, it wasn’t. Real GDP is back on trend.

So then surely we can get inflation back down by destroying demand? No – that’s not how it works. If you destroy demand you will also destroy supply…because that’s how you destroy demand, by getting people laid off. Hiking interest rates will eventually do that – hurt demand and production, but not necessarily do anything to inflation.

To get demand down without destroying supply, you need to run the movie in reverse. You’d need to suck away excess money from the system. That’s not going to happen, of course; it’s easier to do a helicopter-drop than a helicopter-suck. At best, we can hope that money supply flattens out, and recently it has started to look like that’s happening. That would mean that inflation would continue until a new price level consistent with the new quantity-of-money level had been achieved. This is what we can hope – that even though the Fed isn’t draining marginal reserves, somehow money growth slows because demand for loans evaporates even though banks remains eager to lend.  

It might happen, but since we’ve never tightened policy in this way – rates only, not reserve restraint – we don’t really know how, how much, or if it will work. In the meantime, inflation continues to surprise us in a bad way.

The topic for the next couple of weeks is going to be whether the Fed decides to hike 100bps, as the Bank of Canada just did in a surprise move. The market had priced in 75bps, and then a deceleration. I expect they will not, although we need to be defensive against the same leaks-to-the-big-guys that happened last meeting. While the inflation numbers continue to be ugly, and employment has not yet rolled over in a big way, inflation expectations have collapsed. To a Fed that depends very much on the idea of anchored inflation expectations, those markets are saying “okay Fed, you win. Inflation is dead. Your current plan is sufficient.”

That’s not my view, of course. In my view, if you keep using the paddles and the patient doesn’t respond you either need to code him, or you need to find a different treatment. I rather think, though, that the FOMC will say “inflation lags monetary policy by 12-18 months, so we just haven’t seen our effect yet.” Then again, so far I have been completely wrong about the Fed’s determination to hike rates (to be fair, they haven’t yet been tested by a sloppy market decline or a rise in unemployment, but I didn’t think they’d even do this much so I am willing to score that as -1 for the Inflation Guy.)

What to do? With inflation markets fully pricing a return to the old status quo, and that right quickly, it would seem to be fairly low-risk to be betting that we don’t get there so quickly. It would be hard to lose big by buying short breakevens in the 3s, when it’s currently printing in the 9s. Possible, but I like that bet especially since it carries well. And since real yields have risen so much, and the inflation-adjusted price of gold has fallen so much, I’m even starting to like gold for the first time in years. I’m not nutty about it, but it’s starting to look reasonable. It has been a rough couple of months for just about every investment out there (except real estate!), but opportunities are coming back.

Summary of My Post-CPI Tweets (May 2022)

June 10, 2022 2 comments

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.

  • 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.
  • Image
  • 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.

What Happens Next?

March 29, 2022 3 comments

As far back as I can remember, I’ve been fascinated with the fetish that investors have about forecasts and predictions. When I was a strategist, clients wrangled me for a simple statement of where the market was going to go. I had my opinions, to be sure, but by the time I was a senior strategist I also knew that even good forecasters are wrong a lot. Forecasting, ironically, is not a job for people who care very much about being right. Because if they do care about being right, even good forecasters are depressed a lot.

So in my mind, a useful strategist was not one who gave all the right answers. Those don’t exist. A useful strategist was one who asked the right questions. Investing isn’t about being right; if it was, there would be no need to diversify. Just put everything in the one right investment. No, investing is about probabilities, and about maximizing the expected outcome even though that is almost never the best outcome given the particular path of events that actually transpires. Knowing the future is still the best way to make a million dollars.

A valuable strategist/forecaster, then, is not the one who can tell you what they think the actual future will be. The most valuable strategists have two strong skills. First, they excel at if-then statements. “If there is conflict in the Ukraine, then grain prices will soar.” Second, they are very good at estimating reasonable probabilities of different possibilities, so you can figure out the best average outcome of the probability-weighted if-then statements.

However, there aren’t a lot of great strategists, because those same characteristics are exactly what you need to be a good trader. I can’t remember if it was Richard Dennis or Paul Tudor Jones or some other legend who said it, but a good trader says “I don’t know what the market is going to do, but I know what I am going to do when the market does what it is going to do.”

As an investment manager/trader, that’s the way I approach investing. I don’t often engage in a post-mortem analysis about why I was wrong about how a particular chain of events played out, but I often post-mortem about whether the chain of events caused the market outcomes I expected, or not, and why.

All that being said, people keep asking me what I think happens next, so here is my guess at how the year will unfold. Feel free to disagree. I don’t really care if this is what happens, since my job is really to be prepared no matter what happens. But, you asked.

  • I suspect the conflict in Ukraine will continue for quite a while. I also think there’s a reasonable chance that other countries will take advantage of our distraction to be adventurous on other fronts. April is a key month, and I think Russia might be waiting for this other front to open up before pushing harder in Ukraine.
  • However, except inasmuch as the geopolitical uncertainty plays into the general deglobalization of trade, I don’t think about particular outcomes of Russian or Chinese adventurism. I don’t think the long-term inflation trajectory has a lot to do with who is invading who. In the short term it matters, but in the long run it means certain goods will have different relative prices compared to the market basket compared to what they have now – not that incremental inflation of those items, the rate of change of those relative prices, will continue. For example, cutting off the supply of Russian natural gas to Europe would permanently raise the relative price of nat gas in Europe, but after prices adjusted it wouldn’t permanently cause a higher level of inflation of natural gas.
  • March’s CPI print, released on April 12th, will probably be the high print for the cycle for headline inflation, at around 8.5%. Core inflation will also peak at the same time, around 6.50%. This is mainly due to tough comps, though. Monthly prints will still be running at a 4-5% rate, or higher, for at least the balance of the year, and we will end the year with core around 4.5%-5%.
  • The Fed is going to tighten again. I doubt they go 50bps at this next meeting unless the market is expressing desire for that outcome. The market sometimes fights the Fed, but the Fed these days doesn’t fight the market. The FOMC might even start reducing the mammoth balance sheet through partial runoff, but I suspect they will pocket-veto that and not do anything for a couple more months.
  • Interest rates are going to go up, further. Real interest rates are going to rise – actually, our model says that more of the rise in nominal interest rates so far should have been real rates, so TIPS are actually marginally expensive (which is very rare). Long-term inflation expectations are also going to continue to rise, until at least 3.5%…something in line with the reality of where equilibrium inflation really is now, with an option premium built in to boot.
  • Although the near-term inflation prints will come down, the increase in longer-term breakevens means that expectations of the forward price level will continue to rise. The chart below shows the level at which December 2027 CPI futures would be trading, based on the inflation curve, if some exchange actually had the courage to launch CPI futures. One year ago, the implied forward level of 310, compared to the November 2020 level of 266.229, implied that the market expected inflation from 2021-2027 to average 2.2%. That was in the thick of the “it’s transitory” baloney. Today, the theoretical futures suggest that inflation from 2021-2027 will average 3.6%, and that even ignoring the inflation we have seen so far, the price level will rise 3.25% per year above the current level over the next 5.75 years.
  • Stocks are going to decline. It is a myth, unsupported by data, that stocks do well in inflationary periods. At best, earnings of stocks may increase with inflation (and even exceed inflation in many cases since earnings are levered). But multiples always decline when real interest rates and inflation rise. Modigliani said it shouldn’t happen. But it does. And the Shiller P/E right now is around 40.
  • Then, the Fed is going to get nervous. Rising long-term inflation expectations will make the FOMC think that they should keep hiking rates, but the declining equity market will make them think that financial conditions must actually be tighter than they seem. And they’ll be afraid of causing real estate prices, which have risen spectacularly in the last couple of years, to decline as well. They will, moreover, be cognizant of the drag on growth caused by high food and energy prices, and in fact they will forecast slower growth (although it is unlikely that they will forecast the recession until it is over). And, since the Fed believes that inflation is caused by too much growth, rather than by too much money, the Committee will slow the rate hikes, pause, and possibly stop altogether. This is, of course, wrong but being wrong hasn’t stopped them so far.
  • Long rates will initially benefit from the notion that the Fed is abandoning its hawkish stance and because of ebbing growth, but then will continue higher as inflation expectations continue to rise. On the plus side, this will keep the yield curve from inverting for very long, ‘signaling a recession’, but a recession will come anyway.
  • Inflation by that point will only be down to 4-5%, but the Fed will regard what remains as ‘residual bottlenecks,’ since in their models a lack of growth puts downward pressure on inflation. They’ll stop shrinking the balance sheet, and may well start QE again if the decline in asset prices is steep enough or lasts long enough, or if real estate prices threaten to drop.

There you go – that’s my road map. I am not married to this view in any way, and am happy to discard it at any time. But I know what I am going to do when the market does what it is going to do. You should too!

Categories: Uncategorized Tags: , ,

Financial Buyers Aren’t to Blame For High Commodities Prices

February 23, 2022 Leave a comment

Today’s does of non-Ukraine content concerns a misunderstanding about commodities that seems to require regular correction. I’ve seen it resurface recently, most recently in a daily digest from Bloomberg this morning:

“There seems to be something of a vicious circle developing in the commodities space, where investors are increasing their exposure as an inflation hedge, thereby possibly driving up prices further. “

This is not something you should worry about.

I suspect this sort of thinking derives from observations about financial futures, in particular cash-settled sorts. But in contracts for physical delivery, it doesn’t work this way. A purely financial investor cannot drive up prices in the spot market, because such an investor never gets to the spot market. No one, outside of a few sophisticated hedge funds, holds physical commodities as an inflation hedge (with the possible exception of precious metals, which isn’t what they’re discussing here). No one keeps a silo of corn or beans for investment, taking that supply off the market in the process. (Almost) no one keeps a tanker truck of gasoline as an inflation hedge or a pile of aluminum.[1] A financial investor must cover their (long) positions by finding an offset before delivery. Only buyers who actually want the commodity delivered, or sellers who actually have the commodity to deliver, go all the way to final settlement. Ergo, the spot price is determined by actual buyers and sellers of the spot commodity and not financial players.

So, if financial investors in commodities do anything at all, they might push up deferred contract prices relative to spot prices, putting the market further in contango. If anything, this actually would cause the opposite effect from the one noted above since a producer who owns future commodities (in other words, they make production decisions about how much to grow or mine) can lock in a higher selling price than the current spot price – which obviously would make them want to supply more to the market.

But if this was the dynamic, then commodities curves would be in contango (deferred contracts higher than spot contracts); instead we find that commodities curves are in backwardation at levels we haven’t seen in a long time.

[N.b.: if you have the Inflation Guy mobile app, you can look for the Daily Chart Pack under “tools” and on page 17 you will find this chart, updated every day.]

Commodities curves being in backwardation is actually one strong piece of evidence that financial buyers are not driving volatility or activity in commodities markets. Curves are in backwardation because there are shortages in the spot market but producers are still willing to sell future production lower than the current level.

In short – don’t blame the financial players for the rise in commodities prices. Blame years of underinvestment followed by massive money-stoked demand. It’s not hard to see why commodities have risen so much. It’s only hard to guess how much farther they will go. But they answer in any event will not depend on how heavily invested institutions or the general public are.


[1] That can occasionally include pure arbs doing cash-and-carry metals arb, but that’s not much fun when the curves are backwardated like they are now.

The Coming Peak in Inflation (and Why You Should Hold Off on the Party)

January 17, 2022 1 comment

Get ready for it: over the next month or two, the vast majority of stories on inflation – at least, in outlets that are friendly to bullish interests – will remark on the 40-year highs in inflation but append the following phrase:

“But economists expect inflation to moderate in the months ahead.”

This is meant to do two things, if you’re a PhD economist or a market observer with a BA in Art History (the difference in prognosticative ability between these two groups is remarkably slim). First, it is meant to be a soothing reminder that inflation is just a passing fad and nothing to worry about. Pay no attention to the man behind the curtain… Second, it is meant to demonstrate the powerful insights that the speaker commands. Look on my Works, ye Mighty, and despair!

But the contribution of this pronouncement is small. The reason that “inflation will moderate” in the months ahead is simply due to base effects. The table below shows the monthly CPI (seasonally adjusted, headline) prints from 2021, which will be “replaced” in the y/y figures over the next year. The numbers in red all represent inflation which, if annualized, would be 7.7% or higher.

Some of these high prints are driven by energy prices, which are historically mean-reverting, and some are also driven by spikes in “Covid categories” (most famously, used cars). And so most economists’ forecasts project a return to what the economist considers to be the “underlying run rate” of inflation. To illustrate this, look at the chart below. There are two lines. One, the blue line, represents what the y/y headline inflation rate would be each month if we simply naïvely replace every year-ago figure that is “dropping off” with 0.333%. Y/Y inflation is roughly flat for a couple of months since 0.33% is roughly what Jan and Feb 2021 saw; then it starts to fall sharply as we drop off 0.62%, 0.77%, 0.64%, and 0.90%. In fact, if we printed 0.333% on headline every month for the next year, Y/Y CPI would decline in every month except for two of the next 12.

The other line in the chart, in red, shows what is currently being priced in the market. You can see that not much more thought goes into market pricing than goes into economists’ forecasts!

Here’s the critical, salient point. Every forecast ends up showing this mean reversion because the usual way of doing projections naturally ignores unknown unknowns. From the top down, we have to choose something to replace last year’s number and the natural assumption is that the “top down” guess hasn’t moved terribly far from the prior guess (in the case of headline inflation, something like 2.0-2.5%; for 2022 maybe they’ll throw in 3.5% or 4% ebbing to 2%-2.5% in 2023). And from the bottom-up, we know what went up (for example, the spike in used car prices) and we also know that the rate of change of that item will eventually ebb. We’ve known that about used cars for a while. It hasn’t ebbed yet, confounding many, but it will. But do you know what else happened, the unknown unknown, that was not forecast back when everyone was thinking headline inflation would decline into the end of 2021? The acceleration in new car price inflation!

Indeed, one of the reasons that people thought that used car inflation would slow down and even that used car prices might decline is that used car prices were in some cases exceeding the prices of new cars, which is an obvious absurdity. But surprise! Due to “a chip shortage”, or the problem getting foam for seat cushions, or any one of a half-dozen other reasons – but perhaps also due to excessive government largesse – new car prices are now rising at 12% y/y. That was an unforecast “unknown unknown” early last year, and it is one reason that headline inflation ended the year at 7% rather than at 3%. Okay, so there was a “reason” for this surprise. But if you as an economist didn’t see that coming, what makes you think that you will see the next one…or that there won’t be a next one?

Rob Arnott used to make a similar point about corporate earnings. He pointed out that while the “extraordinary items” for any given company, which gets magically discounted when they report their “earnings before bad stuff,” may be a legitimate way to think about the profitability of that company going forward, for the stock market as a whole the amount of “extraordinary items” shouldn’t be discounted since someone is always having a surprise. It’s a surprise in the micro sense, but not in the macro sense. Surprises happen. Similarly, with inflation: we see economists decay away the surprises that have happened, while ignoring the possibility of other surprises.

If the distribution of those other surprises was random – some of them “inflationary” surprises and some of them “disinflationary” surprises, then this could make sense. The errors would be unbiased and so a forecast that ignores them would be less-volatile then reality, but not necessarily a bad “most-likely” guess. But in this case, the errors are likely to be on the high side because money growth remains around 12-13% per annum. Guessing that overall inflation is going to head back to 1.5%-2.5% over the next year or two is simply a bad guess. That it will decline from 7% is a high likelihood, but not exactly insightful.

There is a context in which this observation can be a useful contribution: by reminding the listener that when they see inflation decelerate in the months ahead, it doesn’t mean anything we don’t already know, a statement about the likelihood of declining year/year inflation can be helpful. This is the baseline forecast; only deviations from the expected path are worth reacting to.

And for my money, those deviations are more likely to be above the forecast curve than below it.

And Then There’s the Fed

By the way, if the most-recent inflation numbers were basically as-expected…and they were pretty much right on expectations…then why are Fed officials suddenly sounding more hawkish? An as-expected number shouldn’t change your views, unless your expectations were non-consensus. That seems unlikely when it comes to the flock of Econ PhDs who inhabit the Eccles Building.

I think the reason the Fed is sounding more hawkish isn’t because anything has changed recently – it hasn’t – but because they think we need to hear that hawkishness right now. It’s like a parent thinking that the kids “need” a stern talking-to. The kids, somehow, never think so.

As a Fed official, if you talk tough now you create several possible good outcomes. You might “re-anchor” inflation expectations by persuading investors and consumers that the Fed is determined to restrain inflation. It seems unlikely, given how often they talked in 2020 about having the tools to be able to prevent inflation – and then neither using the tools nor preventing inflation – that they’d get much mileage from that tack but it’s a free option. Or, you might be able to nudge market expectations in such a way that an actual hawkish turn won’t be as damaging as it historically has been. Or, to be cynical, one might think that a Fed speaker wants to get stern in front of the coming ‘base effects’ ebb, so that it looks to the gawkers in the cheap seats like they moved inflation by merely talking about it. And, in the worst case, you can back off the tough talk before you actually have to do anything.

I think there are a lot of reasons that the Fed is not going to be hawkish in any traditional sense; they’re not going to restrain money supply growth by shrinking the balance sheet and squeezing bank reserves (even if they wanted to, that margin is very far away), and they’re not going to raise interest rates in anything like the aggressiveness of a traditional tightening cycle – partly because they won’t be able to stomach the wealth effect of the market reaction to sharply higher discount rates, partly because sharply higher interest rates would cause big problems with the federal budget deficit going forward, and partly because they have convinced themselves that inflation is currently just ‘paying back’ a long period of being ‘too low’ (whatever that means). For now, expect them to aggressively and triumphantly forecast that “inflation will moderate in the months ahead.”

But you know the truth.

Categories: Uncategorized Tags: , ,

Summary of My Post-CPI Tweets (November 2021)

December 10, 2021 2 comments

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 again. And it’s official, this is now the MOST WATCHED economic number of the month. It’s crazy to think that if you had told me two years ago that we would be pushing 40-year highs on #inflation in 2021, I’d have thought you were mad.
  • Amazingly, economists’ predictions for today’s figure would take headline inflation to 6.8% and core to 4.9%. The month/month forecast for CORE is actually 0.5% – an amazing testimony in itself.
  • Some economists are ‘getting religion.’ The last couple of numbers have been shocking (especially last month’s). The September CPI released in Oct was only 0.24% core, but it was broad.
  • The October CPI released last month was 0.599%, AND it was incredibly broad. Median CPI rose 0.57% m/m – by far the largest increase since 1982. Not even close.
  • So this month, people aren’t looking for retracements in an outlier. There’s nothing much to retrace. Indeed, it looks like we might get another push from autos.
  • Used car prices in the CPI rose 2.5% m/m last month; it could be 4% this month. It COULD even be more than that.
  • New car prices have also risen 1.3% in each of the last two months. With used car prices skyrocketing, it’s hard to imagine new car prices flattening out. So from autos, you could contribute 0.2% to core, if they play to chalk.
  • Rents have also been jumping. Unlike Used Cars, only the timing was surprising. I thought it would take longer after the end of the eviction moratorium to see 5% rates of increase and more, but here we are. Both OER and Primary rents were +0.42%-0.45% each of last two months.
  • If that repeats, it adds another 0.16% or so to core. So then you just need to find price increases of 0.14% from everything else in the core categories, to get to your 0.5% forecast. So it’s not a big reach.
  • Lots can go wrong in any month, of course, which is why I try not to overanalyze the number pre-snap. But 0.5% doesn’t seem wildly off as a baseline guess, to me. (The inflation swaps market sees more like 6.9% on headline, so upside risk.)
  • The bottom line is this: although next month we may get some drag from gasoline thanks to the sharp fall in wholesale prices at the end of November, we’re still very likely to hit 7% on headline and will certainly exceed 5% on core over the next few months. That’s amazing.
  • It gets more amazing: Because of easy comps from last year, averaging 0.06% on core for Dec, Jan, Feb, it doesn’t take a lot of imagination to get y/y core to 6% by the end of Q1. Then it should recede…but it’s not going back to 2%.
  • So to put it bluntly, inflation right now is not aiming for the 5 o’clock news. It’s aiming for the history books.
  • Why is this happening? Simple: too much spending, too fast, financed with newly created reserves. Period. The shortages result from getting incomes back above pre-covid levels before we were ready to provide the goods and services to the people waving dollars.
  • Going forward it is hard to see how this resolves easily. There are still many more people not in the workforce than there were pre-pandemic…but more income, by a lot. Demand>supply, and financed by 12% money growth.
  • Moreover, one final thought and a h/t to Barclays for their chart of the HH index. The Herfindahl–Hirschman Index is a very widely-used (especially in antitrust) measure of market concentration. Over the last few decades, it has risen precipitously, meaning more concentration.
  • When market power is concentrated, so is pricing power. And those mega-firms that now dominate just about every niche in American life have re-learned that price increases can stick in this kind of environment. Who can blame them? You build market power for exactly this moment.
  • It’s hard to unscramble this egg. So hang on to your juevos, number in a few.
  • Cents and Sensibility: the Inflation Guy Podcast
  • inflationguy.podbean.com
  • As a reminder, 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.

  • Yawn. CPI as-expected. Just a soothing 6.4% annualized pace of core. 0.53% m/m,
  • Core was actually VERY close to printing 5.0%. Using the seasonally-adjusted numbers you’d get 4.96%, which would round up. NSA numbers give you 4.93%. Doesn’t matter; will be over 5% next month.
  • So, highest headline inflation since 1982, highest core since 1991, with more to come on both.
  • Running through the usual suspects: Used cars were 2.50%. That’s less than I expected. There’s still make-up there next month, believe it or not.
  • Owner’s Equivalent Rent +0.44% again this month. Primary Rents +0.42% again this month. Eerily steady at a high level. This month, Lodging Away from Home was +2.98% m/m. Consequently, the Housing subgroup was +0.52% m/m, 4.8% y/y.
  • I mentioned Used Cars; New Cars was 1.13% (seasonally adjusted) m/m. Car and Truck Rental +1.1% m/m. Airfares this month (a “Covid category”) +4.75%
  • So with airfares, lodging away from home, used and new cars, motor vehicle insurance (+0.66% m/m)…doesn’t look like this wave of COVID is doing much to hold down prices.
  • An eye on Medicinal Drugs is warranted. y/y it’s back to flat. Doctors’ Services also up smartly this month, 4.26% y/y. Hospital Services down m/m but still 3.5% y/y.
  • Overall, Core Goods rose to 9.4% y/y, with Core Services up to 3.4% y/y.
  • Interestingly, two of the eight major subgroups declined m/m: Recreation, and Education/Communication. And we still got 0.5% on core!
  • Here are core goods and core services. Supply chain still an issue for goods. Core services the highest since 2008, and will go higher still thanks to rents.
  • Core inflation ex-housing back up to 5.72% y/y. It was higher in June at 5.81%. But otherwise…back to early 1980s.
  • So let’s see. Only category that declined at a faster than 10% annualized rate was Jewelry and Watches (-20.5% annualized m/m).
  • The list of categories >10% annualized growth. Excluding the 6 food/energy line items there: Mens/Boys apparel, public transport, lodging AFH, Used cars, Women’s/Girls apparel, New cars, Motor vehicle parts/equip, misc personal goods, car/truck rental, tobacco,househld frnishings
  • Looks like the median CPI category will be an OER subindex, which gets separate seasonals, so hard to forecast exactly but another 0.44% m/m or so from Median pushing it up to 3.5% (just my early guess).
  • Median m/m. One exhibit in the ‘broadening’ argument.
  • Once again, not a lot of huge outliers here. Although November and December numbers get harder to tell because the seasonal adjustments are more important (e.g. lodging away from home, negative before SA but strong after SA).
  • Why did Recreation decline? Well, thinks like “admissions”, photographic equipment, cable/satellite television service all declined. So the cake we are supposed to eat is at least getting cheaper.
  • Fascinatingly, 10-year breakevens are down HARD, -4bps on the day to 2.45%. With core pushing 5% and rising. Wonder what kind of number folks needed to stay long??
  • Here are the Four Pieces. Food & Energy. Near multi-decade highs as well. And it’s not just energy – there are ripple effects in fertilizer and therefore food. The Food subindex itself was +5.82% y/y.
  • Core Goods – here is where the supply chain argument is most-salient. Obviously cars are in here and a big part of it. But not all of it! it will come down, but all the way to zero? I have my doubts. And…not soon.
  • Core services ex-shelter. Still the best news out there. Medical care not unreasonable. Mind you, this would have scared me two years ago, but right now it looks soothing compared to the other charts.
  • And the part that was the most-predictable (but took an amazingly long time for people to catch on to): rent of shelter. This has another 1% or more to go, at least. And it’s a big chunk of CPI.
  • The distribution of price changes by CPI component weights. Less of a distribution than a splatter, at the moment. Not much going up less than 3%!
  • And let’s put numbers on that. Only 20% of the consumption basket has risen LESS than 3% over the last year.
  • Almost double the weight of the categories slower than 3%? The categories faster than 4%.
  • Lastly, the Enduring Investments Inflation Diffusion Index reached a new record high. The inflation pressures now are broader than the deflation pressures in the Global Financial Crisis.
  • So wrapping this up…what does this mean for the Fed? In the Old Days, the Fed by now would have already tightened a bunch. Currently, we’re talking about reducing the amount they add in liquidity, maybe a little faster. And possibly raising rates in 2022. That is, UNLESS…
  • …unless stocks drop like a stone. And honestly, it’s not really clear to me that the government would care to see much higher interest costs on the debt. Only way Japan has survived its mountain of debt is that is it almost interest-free, after all.
  • But maybe the hawks will storm the Eccles Building and the Fed will not only raise rates, but also slow money growth (these were once tightly connected; now not so much, and it’s the money growth part that matters not the interest rate part). We can hope.
  • In a recent podcast, “How Many Swallows Make a Spring”, https://inflationguy.podbean.com/e/ep-12-how-many-swallows-make-a-spring/ I expressed my opinion that once the peak is in, the valley for inflation won’t be as low – because we have semi-permanently moved the distribution.
  • So we’re not looking, in late 2022, or in 2023, to get core inflation back to 2%. It’s just not going to happen unless housing collapses (which could happen – lots of weird things could happen – but we don’t base outlooks on what weird things COULD happen).
  • IMO, we’re now in a land of 3%-4% core, maybe if we’re lucky it’s 2.5%-3.5%. Getting it back to 1.5%-2.5% will take strong leadership (HA!) and a long time.
  • Recently, 10-year inflation breakevens reached 2.78% – matching the all-time highs (since TIPS were issued in 1997) from 2005. If you think about breakevens in the same way you think about TS…
  • So, as I wrote last month, you haven’t missed this trade yet. https://inflationguy.blog/2021/11/18/you-have-not-missed-it/
  • Thanks for tuning in. I’ll have the collated summary of these tweets up on my blog within a half hour or so, and will drop a podcast summary of it later. Retweet, call, click, visit, like, upvote, forward, or whatever the kids say these days.

The wonderful thing about December trading is that none of the market moves need to make sense. As I write this, stocks are up and inflation breakevens are down. It’s almost as if high inflation that didn’t actually surprise is somehow helping the ‘transitory’ story. Breakevens act as if the Fed is about to be aggressive and suck liquidity out of the system. But if that’s true, then it’s weird that stocks are higher because an elevated discount rate, with the stock market at record multiples, cannot be a good thing.

There is one way that those moves could be consistent, and that’s as if investors now believe that the inflation spike will indeed be transitory, and that the Fed won’t need to do anything after all. If it was all about some supply bottlenecks that will shortly resolve themselves, and the party can continue, then it would make sense to push inflation expectations lower and also not deflate stocks.

But to be clear, there is absolutely nothing in today’s number that would give any shape to that fantasy. For the third month in a row, the inflation figures were high and the price increases were spread across a very wide variety of categories. There is no one-off to point to. Used Cars adds something – but we haven’t yet seen the peak in that – and that rate of change will eventually ebb. At the same time, other categories are showing new life. This is a much more dangerous look than it was in the first half of 2021, when we expected broadening but it was still believable that “COVID categories” could be the main story. That story is dead and buried. This is not about the pandemic any longer; it is about policy response to the pandemic. It is almost entirely policy error. I will show again the picture from last month, which sums it up. Supply has done what supply usually does following a recession – if anything, it has recovered faster than usual and is back to trend. It’s demand that is far above normal, and that’s not an accident and it isn’t due to COVID. It is a policy error, and it will take many tears (and maybe many years) to reverse.

Summary of My Post-CPI Tweets (September 2021)

October 13, 2021 2 comments

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!

  • Here we are, #CPI Day again – where did that month go!? – And everyone is gathered around for the number. So many interested people! So many experts on inflation suddenly!
  • Last night, @TuckerCarlson led his show with a monologue re inflation. And he got it basically right, which is unusual for nonfinancial media. But the point is, “transitory” inflation is now important enough to get the lead on one of the biggest cable opinion shows in the world.
  • Which of course is why there are so many experts suddenly. Demand creates its own supply. But I am not complaining. There’s only one Inflation Guy and he has his own podcast https://inflationguy.podbean.com and app (in your app/play store)! [Editor’s Note: See the last bullet]
  • More importantly some regional Fed folks are starting to sound queasy. Atlanta Fed’s Bostic and St. Louis Fed President Bullard. The NY Times! The Wall Street Journal! The Poughkeepsie News-Gazette! Made up that last one but it’s everywhere.
  • Not the Chairman though, and not the Treasury Secretary, both of whom want the same thing: more money. Who was it? In the Volunteers with Tom Hanks I think: Mo money means mo power.
  • Meanwhile 1y and 3y expectations in the Consumer Expectations Survey are at all time highs since the inception of the survey in 2013. Which of course is why Carlson is leading with it. Consumers are noticing.
  • Are they only noticing because of used cars? Seems unlikely. They’re noticing broader pressures, which we are starting to see and still will be watching for in this report.
  • Speaking of used cars…while the rate of change might come down on some of these spikes, there’s no sign the LEVEL is retracing. See latest Black Book survey. “Holding steady” around 30% y/y. But that’s down from 50% in May.
  • Consumers are also noticing shortages, which is unmeasured inflation. If you put a price cap below equilibrium, you get shortages. And if you get shortages, you can presume the equilibrium price is higher. Repeat: Shortages are Unmeasured Inflation
  • Now, there’s good news. Delays at China ports are down. Although some of this is seasonal and some is due to the fact that…all the ships are sitting in OUR ports. But there is SOME good news anyway. Had to search for it.
  • Question going forward is how much of the pressure on suppliers gets passed through. It will be more (a) the longer it lasts, and (b) the more suppliers see others passing along costs. And profit season is about to start, where we will hear some of those answers.
  • In this CPI report today: the Street is expecting a very tame +0.2% on core, after a soft +0.1% last month. That seems very, very optimistic to me. If we get +0.27%, the y/y core rate will uptick to 4.1%.
  • And AFTER this, the comps are terribly easy so core inflation will be moving higher almost certainly for the next 5 months. The total for those 5 months in 2020 was +0.43% on core. The TOTAL.
  • So, core will be moving back towards 5%, even if the monthly figures settle in only at 0.2% per month. I’m not very optimistic that’s going to happen. But the Street is!!
  • We will be watching the usual ‘reopening’ items of course, but also watching RENTS and the breadth of this figure. And let’s not ignore food although not in the core – it’s one thing that consumers notice more than other things when it’s persistent.
  • I expect Rents to continue to move higher. So looking for that. And watching Median CPI, which set a new multi-year high month/month last month. It’s at 2.42% y/y and will be higher this month.
  • I’d also look at some of the “re-closing” categories that dragged down core CPI last month to reverse. Again, not a lot of sign that most prices are declining, even if rates of change are slowing.
  • Good luck out there. 5 minutes to the figure.

  • The economists nailed it! Well, mostly. Core was +0.24%, so at the upper end of the forecast range before rounding up. Y/Y went to 4.04%, also just barely not rounded up. But been a while since we were worried about rounding. Let’s look at the breakdown though.
  • Airfares plunged again, another -6.4% m/m. That’s going to change soon if vaccine mandates provoke more labor shortages there. But it does appear, from my own anecdotal observation, that airfares have been actually declining.
  • Lodging Away from Home -0.56% m/m. Used cars -0.7% m/m. Car and Truck rental -2.9% m/m. So, most of the “reopening” categories are still dragging this month, what I’d thought was a one-off. I didn’t think they’d top-ticked the prices before.
  • But New cars and trucks were +1.30% m/m after 1.22% the month before. As I’ve said before, the New/Used gap that closed when Used car prices spiked can open again in two ways. Used car prices can decline (no sign of that) or New car prices can rise.
  • Now, that was your good news for the day.
  • Primary Rents were +0.45% m/m, boosting y/y to 2.43%. OER was +0.43% m/m, boosting y/y to 2.90%. Whoopsie. Totally expected. And yet, kept seeing how the eviction moratorium wasn’t really holding down rents. Hmmm.
  • Medical Care, though, remains a soft spot for reasons that I just can’t fathom. Flat m/m. Pharmaceuticals rebounded to be +0.28% this month, but Doctors’ Services fell -0.30% and Hospital Services followed a strong month with a tepid +0.11%.
  • Apparel also plunged this month, -1.12% m/m. Small category, big move. Still 3.4% y/y, which is big for clothing, but it’s weird. With ports backed up, I’ve been seeing stock-outs in a lot of sizes of the stuff I buy. Shortages are unmeasured inflation. But still.
  • Quick look at 10y breakevens has them +3bps since before the number. The rents spike has people spooked. And it should. That’s the steadiest component. All of these large moves in little categories tend to mean-revert.
  • Core goods decelerates to +7.3% y/y (yayy!). But core services accelerates to 2.9% y/y (boooo!).
  • Core CPI ex-shelter dropped to 4.66% from 4.79%. So that’s the effect of all of these small categories. Meanwhile, rents boomed. And core-ex-rent at 4.66% isn’t exactly soothing.
  • Chart of core ex-shelter, and shelter. In the middle, you get core at 4%. If you want core to get back to 2%, you need core-ex to really plunge because shelter isn’t about to reverse lower.
  • Speaking of shelter, I hate to say I told you so but…and we have a long way to go.
  • Now let’s look at tuitions. Since we are in the Sept/Oct period, we’re going to find the new level of tuitions, which will be smoothed out over the next year with seasonals. This month, the NSA jumped 0.56%, and the y/y rose to 1.73% from 1.20%.
  • Tuitions aren’t going to jump a ton this year, but in 2022 I expect them to take a bump – partly to reclaim colleges’ purchasing power and partly because the product will be better next year.
  • Sorry, error. That was for the Education and Communication broad category. College Tuition and fees rose 0.96% m/m (NSA), and to 1.72% y/y from 0.83% y/y. Sorry.
  • Other goods. Appliances +1.55% m/m. Furniture and Bedding +2.35% m/m. Motor vehicle parts and equipment +0.85% m/m. Medical equipment and supplies +0.96% m/m. So doctors? Not so much. EKG machine? Syringe? Give me your credit card.
  • Breakevens dropping back. That’s profit-taking on the pop. They’re going to keep going up I think.
  • Biggest core m/m declines annualized: Public Transportation (-46%), Car/Truck Rental (-30%), Womens/Girls Apparel (-28%), Jewelry & Watches (-18%), Misc Personal Goods (-13%).
  • Biggest core annualized m/m increases: Motor Vehicle Insurance (+28%), New Vehicles (+17%), Household Furnishings/Ops (+13%), Motor Vehicle Parts/Equip (+11%), Infants’/Toddlers’ Apparel (+11%).
  • I said pay attention to food, which is what people notice. Overall Food & Beverages was +0.87% m/m. Some big movers: Meats Poultry Fish Eggs (+29% annualized), Other food @ home (15%), Cereals/baking products (13%).
  • Oh my. Median. My early estimate, which I hope is wrong, is +0.45% m/m. If I’m right that would be the highest in 30 years. On MEDIAN. Not meaningfully higher than that m/m since 1982.
  • If that’s right, the y/y would be 2.78%. Still short of the 2019 highs, but not for long.
  • That median calculation tells me I need to look at the diffusion and distribution charts. Which will take a couple of minutes to calculate. Please hold.
  • While we are waiting for the diffusion stuff, here are the four-pieces charts.
  • Piece 1: Food & Energy. The most volatile, but recently it’s just been up. And this is the part that people notice. Normally ignored because it mean-reverts. But it’s hard to get near-term bearish on energy or food, especially as the latter involves lots of pkging and transport.
  • Core goods. Coming off the boil because of Used Cars. Staying as high as it is because of New Cars and other durables. Sort of concerning it isn’t dropping faster.
  • Core services less rent of shelter. The one encouraging piece although it relies heavily on medical. Service providers not yet passing through wage increases so much. This is where the spiral would really happen, if it did.
  • Piece 4, and the news of the day. Rent of Shelter is now shooting higher, after being held down by the eviction moratorium and lack of mobility. This will set multi-decade highs over the next year, and as the slowest piece makes “transitory” much harder to believe.
  • The Enduring Investments Inflation Diffusion Index. Not that you need this chart to convince you, but price pressures are the broadest in about 15 years. And getting broader, fast.
  • So, here is the distribution of y/y price changes by base component weights. Note two things: (1) there is a long right tail, which is symptomatic of inflationary periods. Core above median. (2) The whole middle has shifted higher. This is of course largely rents.
  • So…we are getting higher inflation from the slow-moving pieces, and higher inflation from the fast-moving pieces. What’s not to like.
  • And finally, here is a chart of the weight of all components that have y/y inflation above the Fed’s target (which equates to about 2.25% on CPI, roughly). Highest in a long time. Only 1 in 5 purchase dollars is going to something inflating less than the Fed’s target.
  • So in sum…the overall 0.2% on core, which was nearly 0.3%, was the best news of the day. There is nothing in the details, distributions, or trends to make you think this is about to end.
  • Because of comps, we can be confident that y/y core and median inflation are going to accelerate for at least the next 5 months. And there’s nothing to convince me that the monthlies are going to stay nice and tame.
  • Transitory is dead. There is too much liquidity. The Fed now needs to choose whether to drain liquidity (not just taper), and live with much lower asset prices, or keep pumping asset prices “for the rich,” while we all ultimately lose in real purchasing power.
  • Powell is over a barrel, but to be fair he was also the cooper.
  • FWIW, I think the taper will happen. It will stop when one of two things happens: (1) Brainard replaces Powell or (2) Stock prices decline 15%. The Fed is fighting a war and they don’t even know it yet. They are working to keep the bread and circuses flowing.
  • That’s all for today. I will have the summary post up on http://mikeashton.wordpress.com  in an hour or less. Visit our website https://enduringinvestments.com ! Get the Inflation Guy app. Check out the podcast “Cents and Sensibility.” And stay safe out there.
  • Biden to meet with ports, labor on supply chain bottlenecks
  • I mean, this will definitely help, right? “Mister President, since you asked, we’ll clean it up.”

Biden to meet with ports, labor on supply chain bottlenecks

  • Just heard that the Inflation Guy app has been “temporarily” pulled from the Google Play store. Uh-huh. Totally normal. Waiting for the notice from Twitter that I’ve been kicked off for “spreading disinformation.”

One of the ways you can tell this is getting bad is that the people who told us this was all transitory, had nothing to do with money, and would be over soon are doing one or more things from this list:

  1. Pretending they never said it.
  2. Pretending they didn’t mean what they obviously meant.
  3. Getting angry because they were wrong and you were right.
  4. Accuse you of also being wrong because you didn’t specifically say Used Cars was going up.
  5. Trying to talk over, or squelch, the people who are bearing the bad news.

Last month, we had an 0.1% on core. But when you looked at the details, it wasn’t really soothing because it was being held down by the “COVID categories” which were falling again. You didn’t really have to squint, but you had to look below the headline. This month, we almost printed an 0.3% on core, and that was only because of those same categories (plus apparel), for the most part. You didn’t need to look hard to see the problem. Primary rents had their biggest m/m jump since 1999. OER, the biggest jump since the heart of the housing bubble in 2006. Those are big pieces, and we have a great deal of confidence that they are going to continue to rock-n-roll. After all, we have long said that rents were being restrained mainly by the eviction moratorium and would begin to normalize after the moratorium was lifted. Quod erat demonstrandum.

The trajectory of inflation is becoming clearer. The debate is no longer whether inflation is going up but how high it will get and when the peak will happen. That’s the right debate. The ancillary debate is whether the next ebb will be at 2% or something higher, like 3%. Some outliers still see the next ebb as serious deflation, but those are the same people who thought we wouldn’t see inflation when the Fed started printing money that the Treasury spent. [Note to the purists: yes, the Fed doesn’t “print” money, but it’s silly to argue that buying bonds for reserves isn’t equivalent ‘because it’s an asset swap.’ That’s just sophistry. It’s also an asset swap when I buy a refrigerator for cash, but circumstances have clearly changed for both buyer and seller when I do so. Anyway, go sell your crazy somewhere else. We’re all stocked up here.]

There is at least a sliver of good in this mess, and that’s that while investors in the main totally blew the chance to buy cheap inflation protection before this all happened (because they believed inflation was not a risk), and totally forgot that inflation affects not only asset prices but stock and bond correlations, they are re-learning these lessons from the 1970s and 1980s. And so investing hygiene will be better going forward. We have more tools to hedge inflation now than we did in the 1970s, and failing to use those tools in a healthy investment portfolio will no longer be acceptable.

And I know I don’t need to say it, but my company Enduring Investments is here to help those investors. Just like all of those other experts, except we’ve been here for longer.

Average Inflation or Price-Level Targeting: Where Are We Now?

One of the reasons the Federal Reserve has been slower than usual to respond to the upswing in inflation, in addition to claiming that it believes any acceleration to be ‘transitory,’ is that the FOMC cleverly changed its modus operandi a couple of years ago to focus on “average inflation targeting,” or AIT. This adjustment in policy had been debated for many years, as the Committee grew concerned that the Fed could lose credibility (ha ha) in the downward direction if it did not commit to its 2% target symmetrically. They were afraid that, if investors believed they would respond aggressively to inflation but not to disinflation, they would start to incorporate this asymmetry into their investment decisions and push the economy uncomfortably close to price stability.

Parenthetical editorial comment – the idea that the Fed needed to fight against the notion that it might be too hawkish is a head-scratcher. It is unclear how the Federal Reserve could be less dovish than it has been in practice for the last dozen years.

In any event, AIT is similar to price-level targeting, although it is more flexible in terms of the period over which the average is intended to be taken. The Fed meant to signal that it would allow a period of above-target inflation to persist, until at least the period of below-target inflation had been compensated. But again, AIT is vague about what all of this means. However, it happens to have been timely as the Fed now can evince patience with higher inflation, since there had been an extended period during which prices were “too stable.”

How are they doing?

In my recent article “CPI Forwards Show Inflation Concerns Aren’t Ebbing,” I discussed how inflation forwards could be estimated, and give a steady reading on particular points in the future. Here is what that would look like today. If we measure 2.25% target CPI growth (which is roughly 2% on PCE, given the historical spread), then from the announcement of AIT the chart below shows the actual inflation index, and what is implied about the future.

This chart would suggest that the Fed chose an inauspicious time to begin focusing on AIT, since already the undershoot from 2019 has been fully retraced and then some. Moreover, the market seems to believe that the Fed is going to have to focus on a new level, as prices will never get back down to a level implied by 2.25% from the inception of AIT.

As I said, though, the great thing about AIT (from the standpoint of a political economist) is its vagueness. If we instead take as the starting point of the average the period just after the global financial crisis, when rents were recovering at last, then you get a much more agreeable picture. Looked at this way, the market is generously giving credit to the Fed for making a perfect landing, very gradually, over the next 5-10 years.

That seems a bit too generous by half in my opinion, but the takeaway is this: even choosing an extremely long averaging period, the Fed has already used up as much slack as it had saved up. If the next year’s worth of inflation outturns deliver what I think they will deliver, then either the inflation curve is going to become increasingly inverted or the Fed will have to recognize that investors are not buying the AIT framework.


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Summary of My Post-CPI Tweets (August 2021)

August 11, 2021 1 comment

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! And, of course, download the Inflation Guy app from your app store!

  • Now for the walk up: We’ve now had four “high” surprises in a row from the CPI report. In each case, the market for the setting (in the interbank CPI market) has been closer than the economists’ estimate, but still too low.
  • The last four prints on CORE CPI are +0.34%, +0.92%, +0.74%, and +0.88%. The economist consensus for today is 0.4%, with the market closer to a rounded-up 0.5%.
  • (N.b. Core CPI doesn’t trade, but the headline CPI index traded at 273.1 yesterday and that implies 0.54% m/m on headline and something a little less on core)
  • If the economists are right, y/y headline will drop down to 5.3% (just barely) and core to 4.3% from 4.5%. That will be the first decline in quite a while. Unfortunately, the comparisons to last year get easier from here. For the next 7 mos, core is comping 0.14% on average.
  • So even if today we see an ebb in y/y due to base effects, I believe we still have significantly higher highs in core inflation ahead.
  • Now, on the details: we may ACTUALLY see a DECLINE in Used Cars CPI, as the Black Book Used Vehicle Retention Index, the best leading indicator of Used Car CPI, dropped 2.5% last month.
  • But before you get too excited, note that the change in the BB index m/m only has the same SIGN as the change in the used car/truck index about 50% of the time over the last decade. Lagged 1 month, it’s about 60%.
  • So better chance for a decline in used cars next month. But it’s a risk of a drag, and it hasn’t been a risk for a while. One way or the other, the BIG contributions from Used Cars are past.
  • On the other hand, there’s still other “reopening categories” such as airfares, lodging away from home, and car/truck rental that are likely to still be jumpy. And New Cars as well, though this is less obviously a ‘reopening category’ and more about supply chain.
  • Who cares about those, honestly. If that’s where the strength comes from, economists just wave their hands dismissively and say “transitory.” Where I’m focused is shelter (of course), and on BREADTH.
  • Shelter will eventually rise a lot. For a while, the eviction moratorium was holding the average-paid-rent below asking rent increases. And, with another (questionable) extension in the moratorium, that effect is still there.
  • But we have started to see some increases in Primary rents and OER anyway. The difference is just too wide. So, while the meat of that acceleration is ahead of us by some ways, I’m expecting to see it start to happen.
  • And breadth – that’s the real story to watch. Our diffusion index is the highest in years, because it’s not JUST the reopening categories (whatever you read). The scariest number would be another 0.5% on core but without contribution from reopening categories.
  • Now what’s the market impact? Interesting question. There now looks like there is a majority of Fed heads who are willing to at least talk about tapering, and a high core number will reinforce that. But the important voices on the Committee remain firmly dovish.
  • Personally I think that, faced with the decision of somewhat higher inflation vs sharply lower markets, the Fed will err on the side of somewhat higher inflation and keep hoping their models are right.
  • So buy dips in breakevens (the high tails are not priced in, anyway), but not sure I’d be as eager to sell strength in nominals. Stocks probably go up either way, because that’s what stocks do these days (until they don’t).
  • There’s a lot of chatter from companies about being forced to push through price increases and seeing consumers actually not push back as much as they thought, so this is feeling less transitory every day. Don’t think we are going back to 0.1%-0.2% per month soon.
  • That’s all for now. My gut tells me the consensus has finally gotten to something close to a fair bet, but I won’t be shocked at all if we get another 0.7% on core. I also won’t be surprised by a small miss lower caused by some one-off change. So fair, but large error bars.

  • Well, on headline CPI it was finally a tie between economists (slightly too low) and the market (equally too high). But pretty close. Core was 0.33% m/m, slightly soft of estimates.
  • 0.33% m/m, of course, is still 4% annualized on core. But let’s see the breakdown.
  • Glancing I can see the curious bit will be the softness in Primary Rents. 0.156% m/m vs 0.23% last month. That seems odd, but importantly it also is unsustainable. Primary rents are going to go MUCH higher.
  • In reopening categories, Airfares FELL -0.14% m/m (+2.7% last mo). Lodging Away from Home +6% (+6.95% last). Used Cars +0.22% m/m – no decline, but feels like it after +10.5% last month! New Cars +1.72% m/m.
  • Now here’s a big surprise in a very little category. So not much impact, but car and truck rental -4.6% m/m. Last month +5.2%. Rented a car recently? That’s an odd one. But only 0.13% of CPI so rounds to 0.01% effect.
  • The broad core categories: Core Goods +8.5% y/y (8.7% last month); Core Services +2.9% (3.1% last month).
  • Core inflation ex-shelter decelerated to only 5.3% y/y from 5.8%. That’s a little tongue-in-cheek. But to be fair, used cars is still a large part of this.
  • Only large declines (<-10% annualized) in core were Car & Truck Rental and Motor Vehicle Insurance. Large increases in Lodging Away from Home (101%), Personal Care Services (29%), New Vehicles (23%), Car parts/equipment (13%) and Car maintenance/repair (11%). All m.m ann’lized.
  • Early guess at Median is that it will be 0.30%, which would be the highest in several years if I am right. And that speaks to breadth.
  • Here is y/y Rent of Primary Residence. Again, this has a long way to go, to well above the prior levels in fact, unless the boom in housing prices never get reflected in rents.
  • And here is Owners’ Equivalent Rent. Which is moving higher a little more earnestly, but still reasonably inert.
  • Haven’t mentioned apparel. On a nonseasonally-adjusted basis it fell 1% m/m, but seasonally adjusted +0.04%.
  • And I haven’t mentioned Medical Care. Overall +0.26% m/m. Breakdown: Drugs +0.17% (-0.39% last month), Doctors’ Services +0.40% (+0.26%), Hospital Services +0.55% (+0.22%). Some signs there.
  • CPI – Doctors’ Services (y/y). Interesting ratchet pattern.
  • …if you ever think you understand the CPI, just look at Health Insurance. In the CPI, Health Insurance is a residual since consumers don’t pay most health insurance directly. Went from +21% to -9% y/y over last year.
  • So, the four-pieces breakdown. Then we’ll look at diffusion. Here is Food & Energy. No surprise. Not core, but felt in the pocketbook acutely especially by lower-wage employees.
  • Core Goods – slightly off the boil, thanks to Used Cars. This will come back down as the y/y Used Car spike gradually leaves the data. I’m not worried about this staying at 8%. But 4% or 5% given global shipping problems – wouldn’t surprise me.
  • Core services, ex rent-of-shelter. Air fare softness, motor vehicle insurance softness, car and truck rental softness – none of those likely to remain very soft in the near term I don’t think. And medical care heating up a little.
  • And rent of shelter. To be sure, a lot of this is Lodging-Away-from-Home. But then, so was most of the decline. This piece is going MUCH higher over the next year. Our model for OER has it over 5% next year.
  • Now, the big story is the diffusion. Inflation is broadening. Our inflation diffusion index is the highest in nine years. So it isn’t just the reopening categories, folks. Your eyes ain’t lying.
  • Here is the distribution of category price changes. Six months ago, this was skewed to the left. Now, it’s skewed to the right. Long tails to the high side is a signature of an inflationary process.
  • So, let’s sum up. The reopening categories are lessening in importance as we knew they would. Is inflation transitory then? It depends on the answer two two questions:
  • is shelter inflation going to rise? And/or is that transitory? Shelter is slow, and right now it is depressed by the eviction moratorium. It has a LONG way to go, unless home prices and wages plunge. I don’t see those things happening. Ergo, we’re going to see more here.
  • Is inflation due to supply chain constraints in a narrow group of categories? Answer here is no. Price acceleration is broadening. Apparent shortages, resulting in higher price, is how supply/demand imbalances are reconciled in a market economy – even if it’s demand-side.
  • The comps for core inflation get easier going forward. 0.35% next month, but then 0.19%, 0.07%, 0.17%, 0.05%, 0.03%, and 0.10%. Core inflation is going to reach new highs into early 2022. And Median inflation is going to gradually accelerate too as inflation broadens.
  • Last month, the CPI was high but it really WAS mostly about Used Cars. This month is lower, but it’s more worrisome because of the broadening of inflation pressures. I think there’s no turning back now. Inflation expectations are going to be broken.
  • Will the Fed care? I give a ‘taper’ sometime this year maybe a 50-50 chance, although I don’t think it will last very long since the moment that stocks and bonds soften, QE will be back. Every taper so far has led eventually to larger QE!
  • I give almost no chance of an actual hike in the overnight rate, for a very long time. I don’t think Powell or Brainard are going to turn into hawks – they may express alarm at inflation but they would be more alarmed by an equity bear market. Hope I’m wrong.
  • That’s all for today. Remember to download the Inflation Guy app. Tune into @TDANetwork at 1:45ET today. And register for the Simplify webinar tomorrow at https://us02web.zoom.us/webinar/register/5216230941517/WN_O20LE_xlRUOAe7ysdVBDnA  Harley Bassman and Mike Green are the hosts! Busy busy Inflation Guy. Thanks for tuning in!

Well, I had said “the scariest number would be another 0.5% on core but without contribution from reopening categories.” We didn’t exactly get that; it was a little softer on core and some of the reopening categories still contributed. But not all of them. The number of inflating categories is getting broader, and shelter is starting to rise – although still very slowly, thanks to the continued eviction moratorium. All that means is that the rise in rents will be smeared over a longer period, and won’t really get started for a few months although I think there are starting to be clues in the data that shelter costs are percolating. With soft comps, this means that late Q3 and Q4 are very likely to see a sharp acceleration in core inflation. If we only average 0.3% m/m on core inflation, then by March (February’s print) core inflation will be at 5.4%, compared to 4.3% now.

Will that matter to the Fed? Until the people come with torches, probably not. However, these days – I wouldn’t count out the possibility of torch-bearing mobs.

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