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Summary of My Post-CPI Tweets (June 2023)
Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy, but subscribers to @InflGuyPlus get the tweets in real time and a conference call wrapping it all up by about the time the stock market opens. Subscribe by going to the shop at https://inflationguy.blog/shop/ , where you can also subscribe to the Enduring Investments Quarterly Inflation Outlook. Sign up for email updates to my occasional articles here. Individual and institutional investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Check out the Inflation Guy podcast!
- Welcome to the #CPI #inflation walkup for July (June’s figure).
- At 8:30ET, when the data drops, I will run a bunch of charts. Because Twitter has made auto-posting them difficult (still not sure it’s impossible), I’ll post those charts manually with commentary as I go. Then I’ll run some other charts.
- After I’m tweeted out, I’ll have a conference call with my overall thoughts. This is usually around 9:30ish. Later, I will post a summary of these tweets at https://inflationguy.blog and then podcast a summary at inflationguy.podbean.com .
- Thanks again for subscribing!
- The forecasts this month are almost comically low. Keeping in mind that last month, core came in high at 0.44%, and hasn’t been close to 0.3% since October – my forecast is the highest except for Cleveland Fed.
- The first forecasts out of major banks were low even though they had a bump higher from Used Cars. Such a bump seems unlikely, although last month I thought would drag and it did not. But the surveys are worse this month.
- Later bank estimates penciled in declines in Used Cars that make more sense. For a while I thought I was doing something wrong.
- I’m not TOTALLY sure Used Cars will be a LARGE drag. Black Book declined in June, but it also did LAST June, and the Used Cars CPI rose. So there may be a seasonal glitch here that’s not being picked up (or is over compensated for).
- My arms-length calculation suggests an 8bp drag from a -2.4% decline in used car CPI, but I will not be surprised if it’s unchanged. I WILL be surprised at an increase.
- On the other hand, used car CPI has been running ahead of Black Book for a couple of months so perhaps that effect already happened. Thus in classic economist fashion I split the difference and penciled in a 1.2% decline, a 4bp drag on core.
- As you can see from this chart, once you make a minor volatility adjustment Black Book is a VERY good forecast of y/y used car CPI. There is volatility in the month/month (some due to seasonals) but it’s heroic to forecast a large miss.
- Now, aside from Used Cars there must be other drags to give us the lowest core CPI in a long time. The large banks are looking for another decline in airfares and a retracement of the strength in lodging away from home.
- (To be clear, I don’t usually spend much time looking at other forecasts until after I’m done with mine. But I peeked more this month because of the really low forecasts coming out).
- Basically, the Covid categories, along with a sequential additional slowing in rents. I have rents a trifle softer too, but not a ton.
- Traders on Kalshi though MUST have big declines in rents penciled in. The Kalshi forecast for core is among the lowest out there, AND it has been really steady. Decent volumes (compared to history) too. Never say never.
- I think part of what is going on is that summer seasonals drag a lot from the NSA figure. By forecasting low month/month numbers, economists are basically saying the trends haven’t picked up like in a normal summer.
- I am not so sure of that. A lot of those are broad trends, not just in Lodging Away from Home or rents. But I think that’s the source of some of these soft forecasts, implicitly.
- A quick look at the month’s trading leading up to this. Pretty stable overall. Yields are significantly higher, but not in a sloppy way, and breakevens/CPI swaps only marginally wider. Slow summer trading for the most part it seems!
- One final note here. I said last month that we want to see the numbers not only head lower but also BROADLY lower, not just pulled lower by a few outliers. That means rents, it means services ex-rents. Not just health care services, not just Used Cars.
- So we will look beyond the headline for that. Good luck!
- Kalshi ftw I guess! 0.158% on Core and 0.180% on headline.
- First glance, I see -8.11% on Airfares and -2.01% on Lodging AFH. I still don’t see any airfares declining but they have been for several months. This is a BIG one.
- This clearly looks like a trend change, but I’d be a little careful.
- Decline in Education/Communication. Everything else positive but very tame.
- Core goods (+1.3% y/y) went back down, although I suspect that’s mostly base effects. Core Services turning down more in earnest (+6.2%). But again…
- OER and Primary rents have clearly peaked, but no surprise there. OER was +0.45% m/m, down sequentially from +0.52% last month; Primary rents were +0.46%, down from +0.49%. No collapse here.
- So this tells the story better. My estimate of Median is 0.365% m/m. Still better! But not the collapse that core is suggesting. Which tells you the core drop is a tail thing.
- Sorry, make my estimate 0.359%. Energy Services looks like the median category.
- So the “COVID Categories” are where the intrigue is. Airfares as I said, -8.1% m/m. Lodging Away from Home -2.01% m/m. Used Cars was -0.45%, not as low as I’d expected but not an add. Motor Vehicle Insurance was +1.41% m/m…and probably will continue to be. New cars -0.03% m/m.
- Car/Truck Rental -1.43% m/m. Baby Food -1.29%. Health Insurance the usual (for this year; reversing some next year) -3.61% m/m. College tuition is interesting, flat on the month.
- But look: Food Away from Home: +0.38% m/m. Remember, that’s wage-sensitive. So let’s look at the four pieces and see what is happening to core services ex rents.
- Before we do though, here is a chart of (NSA) Airfares. According to the BLS, airfares are back down to where they were pre-Covid. I do not understand that one.
- Piece 1: Food and Energy. Declining on a y/y basis. Now, Food overall was up this month, so was energy, but less than the normal seasonals would suggest and less than last year.
- This was always going to happen – food and energy mean-revert. It was only a surprise in how long it took.
- Core goods, shown before. This is partly due to better supply chains but also partly due to dollar strength. The question is whether it goes back to 0% or slightly negative. I think that’s unlikely, and it matters for whether inflation ultimately settles back where it started.
- Core Services less Rent of Shelter – this looks great! The usual reminder that some of it is a function of the Health Insurance drag that will stop in a few months, and eventually reverse. This will make the Fed feel better though. Yeah, it’s probably not as good as it looks.
- And piece 4, Rent of Shelter. Still way up there, but hooking lower. Is it going to 3% like some forecast? No.
- Core ex-housing dropped to 2.80% y/y, the lowest since March 2021. Part and parcel of the overall nice tone to these numbers. But a lot of them still trace back to a few things, which we’ll see when we look at the distributions.
- This chart won’t change your life but I just want to update it with today’s numbers. Again I wonder what the people calling for an uptick in Used Car prices were looking at. Very modelable.
- Don’t think I said that my estimate of y/y Median is 6.45%, down from 6.74% last month and 7.20% in February.
- Biggest declines (annualized m/m): Public Transport -57%, Lodging Away from Home -22%, Car/Truck Rental -16%. See any outliers? Biggest increases: Motor Vehicle Insurance +22%, Motor Vehicle Maintenance/Repair +17%. Striking the low and high outliers sort of balance except…
- And yeah, most of “Public Transportation” is Airline Fares. Other intercity transportation and Intracity transportation are small weights (and both positive m/m btw). The NSA decline in Airline fares was -6.5%. So not a seasonal glitch: airline fares are plunging. (?)
- Just speculating…there’s been a lot of talk about the improved fuel efficiency so passenger miles are running far ahead of jet fuel demand. So maybe some of this is passing the increased efficiency on to customers (through competition, not benevolence).
- Congrats to anyone who saw that coming to that degree.
- Getting into some of the diffusion stuff. This is the Enduring Investments Inflation Diffusion Index. Dropping all the way to 12 this month. Very good news.
- So gasoline and public transportation go into the mental model of the consumer as one chip each, even though the average consumer buys FAR more gasoline than public transport. But those chips in “transportation” aren’t the same as those in “the food aisle.”
- Anyway that’s the short version.
- Just saw Wireless Telephone Services was -1.46% m/m NSA. That’s odd – ever since data became basically free, the steady deterioration in wireless telephony costs has stopped. This won’t be repeated. The category is 1.8% of core so that’s 2.6bps of drag.
- Last chart. You can see that there is a big weight in 2%-and-under items, a secondary distribution/smattering around 5ish, the two big spikes for shelter, and some far-right-tail items. This is an unclear picture.The far-left items are mostly goods, and the rest mostly services.
- We can all “know” that the airfares and wireless stuff won’t be repeated, and recognize that wage growth is still high (6% on the Wage Growth Tracker) so the important wood is yet to chop. But shelter is in slow retreat, and overall trends look good.
- The data is not exacting any price for a Fed pause. And indeed, hiking into this presents the risk of looking like too much, later. I think the odds of a Fed hike just dropped a lot (I never thought the argument in favor of one was very good, though).
- OK, let’s do a conference call in 5 minutes, at 9:45ET. Call in if you want! [REDACTED] Access Code [REDACTED]
There is no doubting that this was a good number for the market, for the Fed, and for consumers. Yes, core inflation is still 4.8% y/y and Median is still well above 6%. But they’re declining, and that decline will continue.
It’s important to recognize, though, that there has been little debate that there is a deceleration coming in the y/y, partly because of base effects but partly because the Fed has stopped squirting liquidity everywhere. The question is whether inflation is headed back to 2% any time soon. Note that core goods is still well above zero, even with a very strong dollar. If Core Goods doesn’t get negative, there’s not much chance at getting core inflation back to 2% (and note that home prices are rising again, which puts paid to the argument that rents are going to imminently collapse because home prices are going to decline).
What we didn’t see in this figure was the broad deceleration that we really need to see. It is broadening, I suppose, which is why median CPI is slowly declining. We saw huge drops in a few categories that won’t be repeated. Airfares. Cell phones. What we didn’t see were huge jumps in any categories, and that’s encouraging.
The most interesting (and non-repeatable) part of the CPI data was airfares, which was a 5bp drag on core CPI. Amazingly airfares in the CPI are back to the level (not inflation rate, but the price level) seen prior to COVID. Part is lower jet fuel prices, as the regression above showed. But there’s more to it.
I find it plausible that some of the decline in airfares is due to less fuel intensity: more passenger miles with less jet fuel, which is a trend we’ve seen in the weekly energy data. But…have you really seen air fares going down? I haven’t. But I wouldn’t discard this data or expect it to reverse on that basis. Here’s one possible explanation, which is potentially a good reminder not to rely too much on anecdotal evidence without remembering to put the accent on “anecdotal” more than “evidence”: I don’t fly business class, and I don’t buy business tickets. If I were an airline, that’s where I’d be cutting prices – for the non-leisure traveler. Business travel is down, for sure, and is far more discretionary than it used to be. So if you cut the price to the business traveler, overall fares can decline…even if you and I aren’t seeing them. By the way, that’s not the BLS explanation but my supposition.
We need to remember that prior to this figure, there was strong stasis at about 0.4% for core CPI. It’s difficult for me to believe that we jumped from ~5% annualized to ~2% annualized on core, without a stop in between. That being said…this sort of number is great for stocks, and great for bonds, compared to just about any other print. I don’t necessarily think it’s a sign of a sea change, because the big slow-moving parts of CPI aren’t decelerating very quickly. But I can understand the enthusiasm in the markets among those who ignore value and ‘just trade the number’.
This figure also puts the Fed in a bind…or it would, if you really believe the Fed earnestly wants to yank rates up another 50-100bps. I don’t believe that, and think the Fed speakers are mostly burnishing their hawkish credentials to keep markets from getting ahead of themselves. Indeed, they might speak more hawkishly after this, making clear that further hikes are still on the table even though the odds of taking a pass this month just went up a lot.
So enjoy the number! But don’t necessarily get used to it. (That said…Kalshi traders right now have Core CPI for next month at 0.16% m/m. And they were right this month! But repeating this figure without airfares and cell phones will be a serious trick.)
Airline Loyalty Miles Have Become Money, not Tokens
I noticed something recently about the many, many airline loyalty miles that my family has accumulated over the years.
Loyalty miles began as a way for airlines to induce brand loyalty in a market that was very fractured post-deregulation (the U.S. airline industry was deregulated in 1978; the American Airlines and United Airlines loyalty programs were created in 1981…although Texas International Airlines is credited with creating the first loyalty program in 1979). In the Old Days, miles worked something like the punch card at the ice cream store, but instead of getting a free scoop of ice cream after ten purchases, it was a free trip after so many segments flown. Because airlines get compensated basically by the number of passenger-miles they create, the loyalty programs were tied to how many miles you flew. Fly more miles, get more miles. But the redemption was fixed: originally, 20,000 miles got you one round-trip domestic coach ticket anywhere the airline flew.
When you get your free scoop of ice cream, it isn’t the scooper’s decision what flavor you get. It’s yours. With ice cream, that’s no big deal; one flavor costs the ice cream parlor about the same amount to deliver to you as another. But with airlines, the problem is somewhat bigger.
Quantitative aside: experienced rates traders may see an echo of the bond-contract structure where it is the seller of the contract who gets to decide which bond to deliver. This optionality is worth something to the seller, and costs something to the buyer, so the bond contract trades at a lower price than it would if there were no delivery options. In this case, it is the buyer who gets to choose what product the seller must deliver (with limitations, of course). So it is very clear that loyalty programs, at least in the traditional structure where the price of the benefit was fixed at 20k or 25k miles, were very valuable to the customer. So did the customer pay more for a fare than he/she otherwise would, to get miles? We may never know.
When the award was “any flight [other than some blackout dates]” and the cost was “20,000 miles”, the strategy was fairly clear. You wanted to wait until you had to buy a high-priced ticket, and buy that ticket with miles instead. In fact, spending the miles on a $400 ticket had a potential opportunity cost because then you wouldn’t be able to spend them on a subsequent ticket that cost $500. So the strategy was to wait, because the option had value. Moreover, inflation worked in your favor as tickets over time rose. There was no realize cost of carry to penalize not spending the miles…so the strategy was to wait. Your loyalty miles were an inflation-linked bond, whose value was linked to airline fares. Actually, an option on an inflation-linked bond…but I digress.
This has changed.
A few years ago, airlines started varying the amount of miles needed to book certain tickets. Tickets on high-load-factor flights started to cost more. In a way, this was not terrible because it meant that some tickets were available at a higher cost, that previously would have been blacked out. So your 25,000-mile award wouldn’t buy the ticket, but you could get it for 50,000. This was successful, and over time what happened is that ever-finer gradations of mile-award-amounts-needed began to show up.
I took an hour this morning and went on United’s website. I priced economy, non-stop, round-trip tickets for EWR-LAX, EWR-ORD, EWR-DFW, EWR-IAD, EWR-BOS, and MIA-SEA(one stop as there were no directs), for March 24-March 26. I collected the price for each departure time. Then I collected the mileage required to buy the ticket in lieu of cash. The chart of this little experiment is below. The x-axis is the miles needed; the y-axis is the dollar cost, and each dot represents one fare pair.
You may notice that the blue dots are arranged in a surprisingly linear way, at least until 32,500 where it seems there is a cap of sorts. In fact, a linear regression line run through the points produces an r-squared of 0.88, and you can get it to 0.95 or so if you use an exponential curve. But the linear line is instructive because the slope of the line indicates that one airline mile on United is worth almost exactly 2.5 cents. As an aside, I didn’t check other loyalty programs but I would be surprised if the slope of American’s line or Delta’s line was meaningfully different.
The red line is where the old 25,000 award would be. If that was still the cost of a ticket, a buyer would not waste it on the tickets to the left of the line and would only use it on those to the right of the line.[1]
So, let’s call a spade a spade: one airline mile on United is 2.5 cents. When airfares go up, your pile of miles becomes less valuable in real terms. Loyalty miles are now indistinguishable from money, in the air travel marketplace.
Here’s the interesting part. Because loyalty miles are now money, the strategy that you the customer should take completely changes. Before, your best strategy was to wait, allow miles to accumulate, and only use them when prices spiked. Now, because miles are money, your best strategy is to spend them as quickly as you can. They don’t earn interest, so they are a wasting asset in real space. It doesn’t matter if you buy one $800 ticket for 32,000 miles, or two $400 tickets for 16,000 miles each. The value is exactly the same.[2] Ergo, they’re money. Not only that, they’re money that can only be spent on airline tickets, and they have a credit component because if the company goes out of business *poof* there go your miles.
Actually, they can be spent on other things, but the optimal way to spend them is probably on airline tickets. I looked at how many miles I would have to exchange to rent various car sizes from Avis in Newark, for two days starting March 24. I added these dots to the chart below.
So the final moral to this story is: don’t rent cars with airline miles!
[1] Class exam question: draw the consumer surplus that the airline reclaimed by changing the pricing structure.
[2] A small caveat to this would be if the current apparent cap at 32,500 for a coach economy class ticket is fixed, because over time more and more tickets would be pricey enough to be capped. However, I think it is unlikely airlines will hold a cap in that way.
Summary of My Post-CPI Tweets
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 with interests in this area be sure to stop by Enduring Investments. And sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All – and How to Invest with it in Mind, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to WWWM@enduringinvestments.com.
- core CPI+0.13%, softer than expected. Core y/y rose from 1.77% to 1.80% due to soft year-ago comparison.
- Next month we drop off an 0.05%, so we will almost surely get a core uptick. Surprising we haven’t yet. Waiting for breakdn.
- Both primary rents and owners’ equiv accelerated slightly, Which means core EX HOUSING was actually slightly down m/m
- core services rose to 2.6% (mostly on housing); core goods fell to -0.5% from -0.4% y/y. Same story overall.
- Apparel accelerated to -1.64% from -1.85% y/y. Story for years in apparel was deflation; in 2011-12 prices rose>>
- >>and looked like return to pre-90s rate of rise. Then it flattened off, and has been declining again.
- Apparel could well be a dollar story now – it’s almost all made overseas, almost no domestic competition so dollar matters.
- our proxy for core commodities is apparel + cars + med care commodities. all 3 decelerated. Cars went from +0.5% to 0.0% y/y.
- sorry, Apparel actually ACCELERATED to -1.6% from -1.9%, but still negative.
- airfares not really a story. -5.6% y/y vs -5.2% y/y. The NSA number dropped but it always drops in late summer. [Ed note: see chart below]
- airfares was -8.5%, but it was -8.1% last july, -2.9% in 2013, -2.6% in 2012…no story there. didn’t affect core meaningfully.
- Primary rents 3.56% from 3.53%. OEW 3.00% from 2.95%. Both will continue to rise.
- Lodging away from home also rebounded to 2.9% y/y after a one-off plunge to 0.8% y/y last month. Household energy of course down.
- Transportation accelerated (-6.6% y/y vs -6.9%) on small motor fuel recovery. btw, airline fares are only 0.7% of CPI, so 0.9% of core.
- Med Care: goods were dn (drugs 3.2% vs 3.4%,equipment -0.9% vs 0.0%) but prof services up (2.1% vs 1.8%),hospital svcs dn (3.2% vs 3.5%)
- Health insurance only +0.9% y/y vs 0.7%, but more expenditures out-of-pocket under the ACA so higher infl for those categories hurts.
- Median (due out later) might only be +0.1% this month. I have it cuffed at 0.15% but I don’t seasonally-adjust the housing sub-components.
- Last yr Median was +0.17% m/m, so best guess is it roughly holds steady at 2.3%.
- I don’t see how the Fed embarks on a meaningful tightening in Sep, with global economy weaker than it has been in a couple yrs.
- Median inflation and growth plenty strong enough to “normalize” rates but that’s not a new story.
- I’ve been saying they should tighten for a few years but not sure why they would NOW if they didn’t in 2011.
- But Fed doesn’t use common sense or monetarist models.It’s all DSGE;who knows what those models are saying?Depends how they calibrated.
- FWIW our OER models diverge here. Our nominal model says pressures on core start to ebb in a few mo; our real model predicts more rise.
- I like the real model as it makes mose sense…but it’s not tested in a real upswing.
- US #Inflation mkt pricing: 2015 0.8%;2016 0.7%;then 1.6%, 1.7%, 1.8%, 1.9%, 2.0%, 2.1%, 2.2%, 2.3%, & 2025:2.2%.
- …so inflation market doesn’t see inflation at the Fed’s target (about 2.2% on CPI vs 2.0% on PCE) until 2023.
- The market is not CORRECT about that, but another reason the Fed can defer tightening if they want to. And they have always wanted to.
First, let’s start with the airfares chart. One of the early headlines was that airfares plunged by the most since some long-ago year, which held down core. Well, here is the chart of airfares, non-seasonally adjusted. You tell me whether this is unusual to have airfares fall in July.
Because this is part of a normal seasonal pattern, the year-on-year figure was only slightly lower, as I note above. And airfares are a tiny part of CPI, less than 1% of the core. This is not a story.
More important will be the median CPI. This is a much better measure of the central tendency of prices than headline or core, both of which (as averages) can be skewed by a few categories having outsized moves. Median inflation has been ticking higher (see chart below) but will probably go sideways this month.
Finally, the most important chart. There are lots of ways to model housing. If you model rents as lagged versions of the FHFA Home Price Index, or Existing Home Sales median prices, then you get one model and that model suggests that rents should begin to moderate over the next 6-12 months. Not that they will decelerate markedly, but that they will stop accelerating and therefore stop being the driving force pushing core CPI higher. But if you use those models, you have to recognize that you are calibrating over a period of very slow inflation, so that you are effectively ignoring the knock-on effect of higher inflation on rents. That is, if core inflation is around 2% and rents are 3%, then if core inflation rises to 5% you wouldn’t expect rents to be at 3%. So, you need to use a model that recognizes the interrelationship between these variables. And that sort of model implies that rents will continue to climb. Both models of Owners’ Equivalent Rent are shown in the chart below. I prefer the “real” model to the “nom” model, but we don’t know the right answer yet.
Even if OER moderates it doesn’t mean that CPI will stop rising; it just means that the story will stop being all about rents. Core goods still have a long ways to go to normalize, and that might be the next story. But for now, I am still focused on rents.
As I said, I really don’t see how the Fed can think about hiking rates in September based on the data we have seen recently. Yes, inflation is on the border of being an issue, but that has been true for a long time. In 2011, there was plenty of growth and while high rates would not have been warranted, it is hard to argue that normal rates were not called for. And yet, we got QE and more QE. This will end up being the biggest central bank error in decades, regardless of what the Fed does in September. I doubt they will hike, and if they do then it won’t be a long series of hikes. This is still a very dovish central bank, and they will get skittish very quickly if markets balk at more expensive money – which, of course, they are wont to do.
