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Summary of My Post-CPI Tweets (September 2022)

October 13, 2022 8 comments

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy, but to get these tweets in real time on CPI morning you need to subscribe to @InflGuyPlus 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. Investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Check out the Inflation Guy podcast!

The tweets below may have some deletions and redactions from what actually appeared on the private feed. Also, I’ve rearranged the comments on the charts to be right below the charts themselves, for readability without repeating charts, although in real time they appeared in comments associated with a retweeted chart.

  • It’s CPI Day – and here we go again!
  • A reminder to subscribers of the path here: At 8:30ET, when the data drops, I’ll be pulling that in and will post a number of charts and numbers, in fairly rapid-fire succession. Then I will retweet some of those charts with comments attached. Then I’ll run some other charts.
  • Afterwards (hopefully 9:15ish) I will have a private conference call for subscribers where I’ll quickly summarize the numbers.
  • After my comments on the number, I will post a partial summary at https://inflationguy.blog and later will podcast a summary at inflationguy.podbean.com . Busy day for the IG.
  • Thanks again for subscribing! And now for the walkup.
  • Last month, we again had a large upward surprise. Median CPI actually had its highest m/m print of the entire debacle-to-date. While y/y numbers are the big focus in the media, until we have a convincing peak in Median CPI we can’t really say the inflation pressures are receding!
  • Median CPI has moved back above core; this means that for the first time since April 2021 the longer tails are to the downside (the distribution skews lower, so the average is lower than the median).
  • If this is still true once inflation levels out a little bit, it will be encouraging. In inflationary cycles, the outliers show up on the high side and core moves above median. In disinflationary cycles, the opposite is true. Let’s give it some time and see what happens.
  • Rents in last month’s report were big, and though Used Cars set back a little bit New Cars had a big up. But the BIG eye-opener was the rise in core services less rents.
  • I wrote last month: “If core services ex-shelter is really taking the baton from core goods, that’s really bad news. Because core services ex-shelter is where wage pressure really lives. If you want a wage-price spiral, look in core services ex-shelter to see if it’s happening.”
  • So that is my main focus in this report. More later but let’s look at the consensus figures going in. Consensus for headline CPI is 0.21%/8.09%, while consensus for core CPI is 0.43%/6.52%. That will be a small acceleration in core (again).
  • For my money, the implied drag for food and energy (0.22%) looks slightly too large, and the interbank market seems to agree with an implied headline number of about 0.26% m/m. But I also think the core might come in a teensy bit lower than 0.4%.
  • I don’t know if what I am looking at would be enough to round it lower, but an 0.3% core print would make the markets very excited and COULD make the Fed favor a smaller move at this meeting. Not only because of 0.3%, but because things are starting to break.
  • …and the Fed’s models say that inflation should be slowing, so…why not taper the tightening? I think we MIGHT be having that discussion later this morning.
  • Certainly, the mkts have let the Fed go pretty far without throwing up a stop sign. 2y rates +72bps in the last month and 10y rates +54bps? Tens at 3.90% are pretty close to a long-term fair number (still a trifle low) after YEARS of being too low. Naturally, we could overshoot!
  • The decline in forward breakevens is very curious – I don’t see any sign that 2.25%-2.5% as a long-term equilibrium is still the attractor we will drift back to. The fun house mirror is broken for good I think.
  • So where do I see some potential softness? Our models have rents leveling off – not peaking per se, but leveling off – and that means that a trend projection of last month’s number might be overdone. Of course, those are just models.
  • More important (and obvious to many) is the decline in Used Cars prices. Last month, Used were a small drag but New cars added a bunch. We could still get the bump in New, but Used ought to be a decent drag based on the Blackbook figures.
  • But as an aside, this goes back to the error being made by a whole lot of people and politicians especially. See that last chart? Does it say “used car prices are coming back down and reverting, now that supply chain issues have cleared up? NO.
  • It’s a mistake, the same one people are making in rents & home prices. Rates of change could mean-revert. Prices will not. Prices are permanently higher, b/c the amount of money in the system is permanently higher. This chart shows the price level. Not going back to the old days.
  • Politicians saying inflation should ebb soon SEEM to be telling constituents that prices are going back down. At least, that’s what the constituents hear. They will be mad when the politicians say “see?” and they see all prices 30% higher than pre-COVID.
  • (I actually think something similar may be the root of a lot of conspiracy theories about how the government ‘cooks’ the numbers. They’re just talking past each other, with one talking price level and one talking rate of change.)
  • And speaking of money in the system – money supply growth has come to a screeching halt over the last few months, which is great news. Unfortunately, we are still catching up to the prior increase in money, which is why it will take a while for inflation rates to come back down.
  • There’s still work to do. Anyway, a lot of that is wayyyy beyond the trading implications for today’s figure. The key for me is to look past used cars and rents, and look at CORE SERVICES EX RENTS. That’s one of our “four pieces” that you’ll see in a few minutes.
  • If there’s softness in core, it will be taken well by both stocks and bonds and while I might fade stocks in a day or two, I’m not sure I’d fade a rate rally at least at the short end. If I’m wrong, and the core number is HIGHER…it could get pretty ugly. Liquidity is bad.
  • That’s all for the walk-up. Ten minutes until kickoff. Good luck today and thanks again for subscribing! Charts will launch a minute or two after 8:30, assuming data drops on time at the BLS.

  • welllllp. Not soft!
  • m/m CPI: 0.386% m/m Core CPI: 0.576%
  • Further: Primary Rents 0.84% M/M, 7.21% Y/Y (6.74% last) OER 0.81% M/M, 6.68% Y/Y (6.29% last) Lodging Away From Home -1% M/M, 2.9% Y/Y (4% last)
  • Last 12 core figures. About the same as last month. And if you exclude the two little dips, the other 12 are all pretty much 0.58% ish. That’s uncomfortable stability! Don’t want to see that. Comps get tougher going forward so core might not go up much more…but no sign of down.
  • Here is my early and automated guess at Median CPI for this month: 0.667%
  • Now, Median stepped down so that’s good news…but 0.667% m/m is not terrific. This is still the third-highest m/m in the last 40 years or so!
  • M/M, Y/Y, and prior Y/Y for 8 major subgroups
  • In the major subgroups, the drop in apparel stands out. The dollar’s strength is definitely affecting goods prices, and Apparel is one place where we see that most clearly.
  • Core Goods: 6.63% y/y Core Services: 6.65% y/y
  • It’s cute to see Core Goods and Core Services kissing. We know that goods are eventually going to go back down to 0-3%…especially if the dollar remains strong.
  • Primary Rents: 7.21% y/y OER: 6.68% y/y
  • This is a surprise – a further acceleration in rents. Economists might look past this, because with home prices leveling off rents won’t keep shooting higher and higher. Will they? Our model has a peak happening but if wages keep rising then rents need not decline, just slow.
  • Some ‘COVID’ Categories: Airfares 0.84% M/M (-4.62% Last) Lodging Away from Home -1.04% M/M (0.08% Last) Used Cars/Trucks -1.07% M/M (-0.1% Last) New Cars/Trucks 0.67% M/M (0.84% Last)
  • In the covid categories, Used Cars was in fact a drag. And New Cars was in fact a bump higher. There have been some big stories recently about markups for new trucks etc so this isn’t a surprise. But again, core goods will eventually decelerate.
  • Piece 1: Food & Energy: 14.2% y/y
  • Again Food & Energy is decelerating, but again it’s not as much as expected BECAUSE food, which we ordinarily mostly ignore, keeps rising. 10.8% y/y on Food & Beverages!
  • Piece 2: Core Commodities: 6.63% y/y
  • Piece 3: Core Services less Rent of Shelter: 6.62% y/y
  • Soooo…this is the piece that’s sort of ugly and I was worried about this. Core services less rent-of-shelter continues to accelerate. Medical Care was another 0.77% m/m, with Hospital Services 0.66% m/m. I’ll look at some of the other categories in a bit.
  • Piece 4: Rent of Shelter: 6.68% y/y
  • Core ex-housing (not just core services ex-housing) rose to 6.7% y/y. It had gotten as low as 6.04% two months ago but is reaccelerating. We know core goods is decelerating so the upward lift is core services ex-housing. And as I noted, that’s bad.
  • I forgot to mention that the median category was New Vehicles. As always with my Median CPI estimate, I caution that I have to estimate the seasonals on the OER subindices and if I’m off, and an OER category is near the median, then my Median guess might be off too.
  • Food AT HOME was 0.6% m/m (SA), 12.98% y/y. That’s slightly lower than it has been. Food AWAY FROM HOME, though, was +0.94% m/m, 8.48% y/y. This is bad – food commodities are leveling off a little, but wages show up in food away from home.
  • This number could have been worse. Airfares being -4.62% m/m helped. Airfares are largely driven indirectly by jet fuel, but had been positive last month so this is a catch-up. However, jet fuel is probably not going to go down much futher.
  • Conclusions: (a) this number is worse than expected. And not from little ‘I don’t care’ one-off things. (b) Where wages show up in the economy, we are seeing more inflation pressure show up in CPI. That’s not evidence a wage-price spiral has begun, but it is suggestive.
  • (c) since in yesterday’s FOMC minutes, participants had been musing about the risk of a wage-price spiral, this is especially salient right now. (d) This seals 75bps. They won’t do 100bps, and this report doesn’t let them do 50bps.
  • (e) This MAY raise the terminal rate. We will get more inflation data, but median CPI isn’t showing a deceleration and the m/m core is pretty solid at a 7%-ish rate (0.58%/mo) with occasional dips. Need at least 2 dip months.
  • (f) The deceleration in core goods is already happening. It has been happening. The dollar’s strength will help it to continue. But the acceleration in core services is more durable and not dollar-sensitive.
  • (g) it’s also not particularly rate-sensitive. (h) Higher wages also support higher rent growth. I am surprised at the extent of the strength in rents but put that (somewhat) in the wage-price spiral camp.
  • And finally (i) inflation markets are ridiculously mispriced. There is no reason to think that 2.25%-2.5% is the fair bet for 10-year inflation, especially when it’s going to be at 5% or above for the first 2 years of that 10 years. This is going to take a while.
  • I’m going to do a quick call right now and present my thoughts. Dial-in is <<redacted>> and Access Code <<redacted>>.
  • I will throw another housing-related chart here. Here is OER in red, against two home-price indices that are often used to model rents as a lagged function of home prices. The leveling-off should happen soon. BUT>>
  • …BUT the betas have changed and OER is higher than we would have expected based on the prior relationship. Those regressions were all based on nominal changes, not real…part of home price increase should be pass-through of value of real property, greater when infl is higher.
  • Either way, the timing suggests we should level off, and if you believe this model then in 6-12 months rents should be in sharp retreat. Maybe. But like I say, things have changed from the 2001-2020 baseline!

We keep waiting for a clear turn in inflation, and it hasn’t happened yet. Moreover, the longer it lasts then the more likely that it feeds back into wages, since workers have more and more evidence to take to the bargaining table when it’s time to discuss increases. Some of the feedback loops are purely automatic: For example, on the basis of today’s figure Social Security benefits next year will jump 8.7%, giving retirees an additional slug of cash to spend next year. That automatic adjustment also creates a feedback loop in deficits, of course – that big increase in benefits will also increase federal outlays! So, if you were hoping to balance the budget rather than pour more fuel on the fire…it just gets harder and harder.

The slight drop in m/m median CPI is nice, but not sufficient to signal that inflation pressures have turned. For a very long time, everyone else was surprised with the resilience in inflation and I was not – but now I’ve joined the ranks of those who are surprised. I haven’t thought, and do not think, that inflation will fall back to 2% any time soon, but I also didn’t think it would keep accelerating into year-end. I still don’t think that. But…it’s also hard to see where the deceleration is going to come from. Our models (and the final chart above) give reason to think that rents might level off from here, but not decelerate much; core goods will continue to retreat but core services seem to have a feedback loop going. The fact that food away from home is accelerating while food at home is correcting slightly is emblematic of the passing of the torch from raw materials pressures to wage pressures. This is not good.

That being said, and while 75bps is pretty much cemented now at the next Fed meeting, I still think that the FOMC is looking for reasons to slow the pace of hikes. Things are starting to break around the world, and there’s no appetite (I don’t think) to test the limits of the system’s fragility right now. But the balance sheet is going to continue to shrink slowly, and that’s a big part of the decline in market liquidity. Certainly, the market has been generous with the Fed so far and hasn’t offered them the Hobson’s choice of saving the markets or pushing inflation lower…but that choice is going to come sooner or later especially as inflation has not yet shown any real signs of slowing down.

And yet, as I write this the stock market has closed the gap by rallying up to yesterday’s closing level, and is spiking higher. That’s remarkable, and I think it’s fadeable!

Summary of My Post-CPI Tweets (March 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!

  • It’s #CPI #inflation day again, and a watershed one at that. If you had told me back at the beginning of my career in 1990 that we would see 8.5% inflation again, I would not have been surprised. If you had told me it would take 32 years, I would have been flabbergasted.
  • But, here we are. The consensus Bloomberg estimate is for 8.4% on headline inflation with 6.6% on core. That’s monthly of about 1.25% and 0.5% (!) But last month, the interbank market was looking at an 8.6% peak, so I guess that’s good. Energy has come off the boil some.
  • But this is the first number that is fully post-Ukraine-invasion so it will still get a big dollop of energy inflation.
  • 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 http://inflationguy.podbean.com . And all of that also will be linked on the Inflation Guy mobile app. Please stop by/tune in.
  • First, the good news. I expect today’s figures will mark the highs for the year. The comps get really hard hereafter: in April 2021, Core CPI rose 0.86% m/m, 0.75% in May, and 0.80% in June.
  • The bad news is that inflation might not ebb very far. The last 5 monthly core prints have been between 0.5% and 0.6%. The central tendency of the distribution appears to have moved up from 2-3% to maybe as high as 6%+.
  • That means that even when inflation is at an ebb, we’re looking at 3-4 ish, not 1ish. More good news though! The Fed in theory has total control of this. If it aggressively shrinks the balance sheet, then it can wring inflation out of the system.
  • I have no doubts that the Fed has the tools. There have been signs they aren’t focusing on the right ones. And there’s at least new vigor in the talk. But I am still skeptical that they are willing to break things.
  • By aggressively shrinking the balance sheet, I don’t mean $60bln a month; I mean taking the whole thing down to $2-4T in a reasonably short period of time.
  • But while it now looks like the FOMC will bull ahead with 50bps this month (surprising me), I just can’t bring myself to believe that it will crack the stock market and keep tightening through the recession we’ll get in late 2022/early 2023.
  • 275bps of rate hikes? Color me skeptical as soon as the growth data starts to flag a bit, or unemployment ticks up.
  • That’s really the longer-term question. Will the Fed do what it takes to break the cycle they put into motion, by reversing it? AND will they resist responding to the next recession with more of the same? I have my doubts. Would be happy to be wrong.
  • Wages, food, and rents have been booming. There is some feedback going on here. Of course, the main culprit continues to be the huge increase in the quantity of money over the last few years. The rest of it is micro.
  • But if you’re looking at supply chain issues – they haven’t gone away. In some cases they’re getting worse. As a reminder, though, that’s how inflation manifests, is in shortages of things that are over-demanded thanks to the money gusher. Prices adjust in response.
  • The bond market is starting to adjust to the realities of a hawkish Fed although not yet really putting rates at anything we would consider neutral (with a 10y rate around GDP+desired inflation, say 4-5% total).
  • Over the last month, inflation expectations have been broadly unchanged to slightly lower – although a lot of that is carry going away. Real rates are up 50-100bps, and nominal rates up 80-85bps. That’s big, but not nearly big enough to make a serious difference.
  • Why hasn’t the stock market begun to reflect the higher inflation? Partly because inflation expectations still haven’t firmly broken higher. And, after all, real rates are still slightly negative. But we’ll get there.
  • Now, in today’s number we will look aghast at the food category. High and persistent inflation in food and energy is not something policymakers can do a lot about, but it IS what leads to global political unrest…which leads to more supply chain problems and de-globalization.
  • Rents will remain high, currently trending towards 5-6% as Primary Rents continue to adjust post-eviction-moratorium.
  • And Owners’ Equivalent Rent remains high but steadier (at least recently). This is likely to remain so for the rest of 2022. Remember, the rent pieces are the big slow-moving pieces. Usually slow-moving, that is.
  • On the other side, I think there is a chance that Used Cars are a drag although prices themselves aren’t going to go back to the old levels. Might retrace a bit, but the new price level is higher – that’s what the money does. So rate of increase will decline. Level? Not so much.
  • But airfares and lodging away from home may be adds. Look as usual for the breadth; the odd stories will be the categories that did NOT rise.
  • I’m also still watching the Medical Care subgroup, as the inflation there has remained surprisingly tame through all of this. Only Medical Care and Education/Communication are below 2.5% y/y among the major categories! They’re due to participate eventually.
  • Here we go. Three minutes. Good luck. Take a picture to remember this by. At least until we get higher numbers in 3 years.

  • Pretty close. The headline number showed 8.5% y/y because the monthly number was just a little higher than expectations. But with all the volatility, that’s a great consensus estimate. Core was quite soft, at 0.32% m/m. Well, that’s soft these days.
  • Y/y core CPI therefore was only a snick or two higher, 6.44% y/y vs 6.42% y/y last month. As a reminder, hard comps are coming up so that probably marks the highs in both headline and core. Question is how far and how fast they drop.
  • That was the lowest core CPI figure since the three soft ones of July/Aug/Sep last year. We’ll look at the components.
  • A big culprit was, as I thought it might be, Used Cars. The private surveys had had a decent drop recently; in the CPI they were -3.8% m/m so that the y/y is “only” 35.3%.
  • Airfares, were +10.7% m/m. Lodging away from home +3.28%. But those are smaller weights. New Cars were only +0.18% m/m, so it does look like while New Car prices are going up, Used Car prices are also going down to re-establish a more normal relationship. This will take some time.
  • Car and truck rental was +11.7% m/m. That’s remarkable too. Rental car companies are having trouble getting enough new cars, and that’s one reason used car prices won’t plunge any time soon. But also, people are traveling again!
  • Food & Beverages: +0.96% m/m, +8.5% y/y. Food prices won’t recede soon. In addition to the loss of Russian and Ukraine supplies, there has been a recent culling of chickens due to bird flu. Like we needed that.
  • Core inflation ex-housing declined from 7.6% to 7.5%. Big whoop.
  • Core goods prices, thanks significantly to Used Cars, decelerated to 11.7% from 12.3%. But core good prices accelerated to 4.7% from 4.4%. Until the last 3 months core services hadn’t been at a new 30-year high, but they are now.
  • Remember, services prices are the slower-moving ones. BTW, this month Primary Rents were +0.43% (y/y up to 4.54% from 4.31%) and OER was also +0.43% (y/y 4.45% vs 4.17%). Both still headed higher but both slightly lower than last month.
  • In Medical Care: medicinal drugs was +0.23%; Doctor’s Services +0.49%; Hospital Services +0.40% for an overall increase in medical care of 0.55% m/m. Y/Y up to 2.86%.
  • Education/Communication was DOWN m/m, -0.17%. It’s really the only holdout category here. And if you want to find a place where there should be adjustments to LOWER quality post-COVID (implying more inflation), this is it!
  • Haven’t talked abt Apparel for a while. The y/y increase there is now ~6.8%. Apparel is a category that has been in deflation on net since the Berlin Wall fell. We import almost all of it. And prices have recovered the entire COVID discount and don’t look like they’re slowing.
  • Looking at housing, it is now running a bit hotter than my model; however, I think we could get an offsetting snap-back above the model reversing the underperformance during the eviction moratorium.
  • The main problem with housing inflation isn’t that it is going to 18%, but that it is slow-moving and it’s going to stay high for quite a while. High means 4.5%-5.5%, maybe a bit more even; given its weight in the CPI that means core CPI isn’t going back to 2% soon.
  • Market check, just for comic’s sake: Stocks absolutely love the decline in used cars which led to a softer core number. Breakevens are lower, but not so much.
  • While I wait for the spinning beach ball, this is a good time to remind you that a summary of all of these tweets will be on https://mikeashton.wordpress.com within an hour or so after I conclude. Then later today I will have a podcast version at https://inflationguy.podbean.com
  • The median CPI chart kinda tells the story. This was really never ‘transitory.’ The entire distribution has been steadily moving higher and breaking from the old range to a new range.
  • People ask me the best inflation hedge these days? For most normal people with normal amounts of money (annual purchases of these are limited), i-series savings bonds are the best deal the US Government offers. Maybe ever, at least when real rates everywhere else are negative. “The interest rate on inflation-adjusted U.S. savings bonds will soon approach 10%”  https://on.wsj.com/3rkEFVw
  • We put our database in the cloud so everything is super slow at the moment. I’m going to call a halt here. Some of my other regular charts will be in the post, at https://mikeashton.wordpress.com , so stop by later and check it out (or go there now and subscribe to the post).
  • Bottom line is that the basic story is the same. Broad and deep inflationary pressures. Don’t get distracted by the used cars thing; it didn’t create the inflation and it isn’t putting it out.
  • No sign yet that these pressures are ebbing. In fact, the acceleration in Medical Care bears watching. Also, the extended rise in food & energy is going to have other repercussions.
  • Is the Fed going to hike aggressively and (more importantly) squeeze down the balance sheet aggressively in this context? If stocks and bonds were going to be unchanged, sure. But they’re not going to be.
  • Treasury probably can’t sustainably manage the debt if long interest rates get to 5% (unless inflation stays at 8%). And stocks aren’t worth the same when discounted at 5% as when discounted at 1%. I am confident the Fed will blink. Maybe not as early as I originally thought.
  • One final word and chart. 75% of the weight in the CPI are now inflating faster than 4%. More than a third of the basket is inflating faster than 6%. This is an ugly chart.
  • Thanks for tuning in. Be sure to call click or visit! https://mikeashton.wordpress.com  or https://inflationguy.podbean.com  to get the podcasts. And download the Inflation Guy app!
  • Correction here…the y/y should move up to more like 4.9%, not 4.5%.
  • Highlighting that the number today was mostly dampened by used cars…looks like Median CPI will come in something around 0.5% again. Since September it has been 0.4-0.58% and the y/y will move up to around 4.5%. So don’t get too excited (equity dudes) about the softer core.

The Federal Reserve didn’t get any favors from the Bureau of Labor Statistics today. While the core CPI number was a little below expectations, that miss was entirely due to Used Cars. But while that category was an early champion of the “transitory” crowd, the fact that used car prices are declining slightly after a massive run-up is not a sign that the broader economy is slipping into deflation! It is a sign that that particular market is getting into slightly better balance.

Don’t confuse the micro and the macro. We get wrapped up in the supply and demand thought process because that’s how it works at the micro level. When we look at a product market, we don’t see ‘money’ as being a driver. It is, because you can think about the inflation of any item as (general price inflation) plus (basis: difference in the item and overall), where that basis is driven by those microeconomic supply/demand effects. The former term drives the overall level of inflation; the micro concerns drive the relative price changes. The used car market is getting into (slightly) better balance, but other markets are getting worse. Until the overall level of money growth slows a lot, and the aggregate price changes catch up with the aggregate change in the money supply, inflation is not going to vanish no matter what happens to “aggregate demand.”

As a reminder, M2 has risen some 40% since early 2020. Subtract out net real growth, and you’d expect to see 25%-30% aggregate rise in the price level – if M2 growth went flat. That’s why I say that if the Fed wants to crush inflation, it actually needs to cause M2 to decline, not just level out at 6%. I don’t see any chance of that happening because to do it the Fed would need to remove basically all of the excess reserves and make banks reserve-constrained in lending markets so that lending declines. This seems very unlikely! So will the Fed tighten 275bps? Someday…maybe over a couple of cycles when the real damage from inflation finally wakes them up. Right now, this is a short-term problem to them. I don’t think they’re willing to take a massive market correction to solve what they believe is a short-term problem.

Don’t Look Now, But

July 16, 2013 2 comments

In our business, one must be very careful of confirmation bias of course (as well as all of the other assorted biases that can adversely affect one’s decision-making processes). And so I want to be very careful about reading too much into today’s CPI report. That being said, there were some hints and glimmers that the main components of inflation are starting to look more perky.

Headline (“all items”) inflation rose in June to 1.75% y/y, with core inflation 1.64%. About 20% of the weights in the major groups accelerated on a year-on-year basis; about 20% declined, and 60% were roughly flat. However, two thirds of the “unchanged” weight was in Housing, which moved from 2.219% to 2.249% y/y…but the devil is in the details. Owner’s Equivalent Rent, which is fully 24% of the overall CPI and about one-third of core CPI, rose from 2.13% to 2.21%, reaching its highest rate of change since November 2008. Primary Rents (that is, if you are a renter rather than a homeowner) rose from 2.83% to 2.89%, which is also a post-crisis high. Since much of my near-term expectations for an acceleration in inflation in the 2nd half of the year relies on the pass-through of home price dynamics into rentals, this is something I am paying attention to.

This is what I expected. But can I reject a null hypothesis that core inflation is, in fact, in an extended downtrend – that perhaps housing prices are artificially inflated by investor demand and will not pass through to rents, and the deflation in core goods (led by Medicare-induced declines in Medical Care) will continue? I cannot reject that null hypothesis, despite the fact that the NAHB index today surprised with a leap to 57, its highest since 2006 (see chart, source Bloomberg, below). It may be, although I don’t think it is, that the demand is for houses, rather than housing and thus the price spike might not pass into rents. So, while my thesis remains consistent with the data, the real test will be over the next several months. The disinflationists fear a further deceleration in year-on-year inflation, while I maintain that it will begin to rise from here. I still think core inflation will be 2.5%-2.8% by year-end 2013.nahbboom

In fact, I think there is roughly an even chance that core inflation will round to 1.8% next month (versus 1.6% this month), although the 0.2% jump will be more dramatic than the underlying unrounded figures. The following month, it will hit 1.9%. That is still not the “danger zone” for the Fed, but it will quiet the doves somewhat.

Meanwhile, the Cleveland Fed’s Median CPI remained at 2.1%, the lowest level since 2011. The Median CPI continues to raise its hand and say “hello? Don’t forget about me!” If anyone is terribly concerned about imminent deflation, they should reflect on the fact that the Median CPI is telling us the low core readings are happening because a few categories have been very weak, but that there is no general weakness in prices.

Although I maintain that the process of inflation will not be particular impacted by what the Fed does from here – and, if what they do causes interest rates to rise, then they could unintentionally accelerate the process – the direction of the markets will be. And not, I think, in a good way. We saw today what happens when an inflation number came in fairly close to expectations: stocks down, bonds flat, inflation-linked bonds up, and commodities up. Now, imagine that CPI surprises on the high side next month?

Speaking of the fact that commodities have had (so far at least) their best month in a while, there was a very interesting blog entry posted today at the “macroblog” of the Atlanta Fed. The authors of the post examined whether commodity price increases and decreases affect core inflation in a meaningful way. Of course, the simple answer is that it’s not supposed to, because after all that’s what the BLS is trying to do by extracting food and energy (and doing that across all categories where explicit or implicit food and energy costs are found, such as in things like primary rents). But, of course, it’s not that simple, and what these authors found is that when commodity prices are increasing, then businesses tend to try and pass on these cost increases – and they respond positively to a survey question asking them about that – and it tends to show up in core inflation. But, if commodity prices are decreasing, then businesses tend to try and hold the line on prices, and take bigger profit margins. And that, also, shows up in the data.

To the extent this is true, it means that commodity volatility itself has inflationary implications even if there is no net movement in commodity prices over some period. That is because it acts like a ratchet: when commodity prices go up, core inflation tends to edge up, but when commodity prices go down, core inflation tends not to edge down. Higher volatility, by itself, implies higher inflation (as well, as I have pointed out, as increasing the perception of higher volatility: see my article in Business Economics here and my quick explanation of the main points here). It’s a very interesting observation these authors make, and one I have not heard before.

Summary of My Post-CPI Tweets

June 18, 2013 3 comments

The following is a summary and further explanation of my tweets following today’s CPI release:

  • core #inflation +0.167, a smidge higher than expected but basically in line. Dragged down by medical care (-0.13%).
  • Housing #inflation a solid 0.3%…this part is, as we expected, accelerating.
  • Core commodities still dragging down overall core, now -0.2% y/y while core services still 2.3%.
  • I still think Owners’ Equiv Rent will get to our year-end target but core goods not behaving. Have to lower our core CPI range to 2.5%-2.8%
  • That 2.5%-2.8% still much higher than Street. Still assumes OER continues to accelerate, and core goods drag fades. Fcast WAS 2.6-3.0.
  • Note that CPI-Housing rose at a 2.22% y/y rate, up from 1.94% last month. Highest since late ’08 early ’09. Acceleration there is happening.
  • Major #CPI groups accel: Housing, Trans, Recreation (63.9%), Decel: Food/Bev, Apparel, Med Care, Educ/Comm (32.7%)
  • Overall, IMO this CPI report is much more buoyant than expected. Core goods is flattering some ugly trends.

The important part of this CPI report is that CPI-Housing is finally turning up again, as I have been expecting it would “over the next 1-3 months.” Hands down, the rise in housing inflation (41% of overall consumption) is the greatest threat to effective price stability in the short run. Home prices are rising aggressively in many places around the country, and it is passing through to rents. Primary rents (where you rent an apartment or a home, rather than “imputed” rents) are up at 2.8% year/year, the highest level since early 2009, but not yet showing signs that it is about to go seriously vertical. Some economists are still around who will tell you that rapidly rising home prices are going to cause a decline in rents, as more rental supply comes on the market. That would be a very bizarre outcome, economically, but it is absolutely necessary that this happen if core inflation isn’t going to rise from here.

The last 7 months of this year see very easy comparisons versus last year, when CPI rose at only a 1.6% annualized pace for the May-December period. Only last June saw an increase of at least 0.20%. So, even with a fairly weak trend from here, core CPI will rise from 1.7% year/year. If each of the last 7 months of this year produces only 0.2% from core CPI, the figure will be at 2.2% by year-end. At 0.25% monthly, we’ll be over 2.5%; at 0.3% per month core CPI will be at 2.9% by year-end. So our core inflation forecast, at 2.5%-2.8%, is not terribly aggressive (and if we are right on housing inflation, it may be fairly conservative).

We have not changed our 2014 expectation that core CPI will be at least 3.0%.

Honest, Abe?

November 15, 2012 4 comments

Today was CPI day, which after Christmas and Thanksgiving is one of my most favorite of days. Here is what I tweeted earlier today (and there’s lots more commentary below):

  • unrounded core CPI at +0.18%, a bit higher than what dropped off. Not exactly alarming, but higher than Street expectations.
  • y/y core to almost exactly +2.000%. Apparel rose again after the recent rise had slowed in the last couple of months.
  • Subindices: ACCEL: Housing, Apparel, Transp, Food/Bev (75.2% of basket). DECEL: Med Care (6.9% of basket). UNCH: Recreation, Comm/Ed, Other
  • OER was unch…rise in Housing came from primary rents (that is, you actually pay rent) and lodging away from home.
  • Core goods inflation stayed stable at +0.7% y/y; core services stable at +2.5%. I think the former number is going to rise.

This was actually something less than the most exciting CPI report in history. It was better than the Street expected, and although the year/year figure barely nudged higher the components of the number were strong. The rise came from Housing, which ought to continue to accelerate for a while given rental tightness and other forward-looking indicators, and Apparel resumed its rise as well. See the chart below (source: Bloomberg) for the update to what is rapidly becoming one of my favorite inflation-related charts.

The Cleveland Fed’s Median CPI dropped just enough to round down to +2.2% on a y/y basis, and the Atlanta Fed’s “Sticky” CPI is also at 2.2%. These measures are other ways to look at the central tendency of the inflation figures, and suggest that the current 2.0% from the traditional Core CPI is likely to converge higher rather than vice-versa.

But today didn’t change any inflation paradigms.

There was other news, however, that struck me as inflation-related and worth commenting on.

One was a story in the UK Daily Mail citing the case of a Denny’s franchisee (he owns a few dozen Denny’s restaurants) who is planning to add a 5% “Obamacare surcharge” to customer dining checks.

Now, the sum of all of the sales of this man’s Denny’s restaurants is a tiny part of the CPI category “Food away from home,” which is itself a small part of CPI, so it won’t have any impact on the numbers. Even if lots of restaurants followed suit, it wouldn’t have much of an impact since “Food away from home” is only 5.6% of the consumption basket (so a 5% surcharge on all checks would cause a rise in CPI of 0.28%), but it serves as a good reminder of one important point.

The higher taxes and other costs of doing business that are going to be targeted at business is going to show itself to individuals one way or the other. The higher cost of Obamacare compliance, and any other increased business taxes, will not be paid by businesses for the simple reason that businesses are pass-through entities. That is, businesses don’t make money; people who own businesses (partners or shareholders) make money. So whether the higher costs show up as higher prices to the consumer (in which case the government’s attempt to raise revenue from business will result in higher inflation prints, as the transition takes place) or as lower profits to the businesses themselves, the cost will end up being borne by real humans.

At the end of the day, how much of these costs is absorbed by the owners and how much is paid by the consumers is determined by the elasticity of supply and demand for the product. For example, if the elasticity of demand is infinite, then the owners will bear the entire cost; if the elasticity is zero, then consumers will pay it all. My personal guess is that given the current level of gross margins, more of these taxes and higher costs will be paid by owners – implying lower equity earnings – than by consumers, but we will see. But notice that either way, you get lower real earnings. Either nominal earnings fall, or prices rise. Not good for stocks in either case; bad for bonds in the latter case, too.

Then there are the actions of several central banks in the other hemisphere. A story in the Wall Street Journal,  and echoed elsewhere such as in this Australian news outlet, suggests that the Reserve Bank of Australia has adopted a form of QE by allowing its foreign currency reserves to rise in order to push down the currency. The RBA has been one of the bastions, at least relatively, of ‘hard money’ in a world of central banks that have gone wild, so this isn’t a positive development unless you’re long inflation-related assets.

And also hard to miss were the comments by the leader of Japan’s main opposition party, Shinzo Abe, who may become the next prime minister quite soon. Abe suggested that the Bank of Japan should target 3% inflation, rather than 1% inflation, and threatened to revise the law that (supposedly) insulates the BOJ from politics.  Note that 5-year Japanese inflation swaps are near all-time highs, but still only at 0.77%, and 10-year inflation swaps are at only 0.48%. Under Abe’s pressure, we would likely see a substantial acceleration in QE by the BOJ, which has already succeeded in pushing core inflation in Japan from -1.6% to -0.6% over the last two years (see chart, source Bloomberg).

We are increasingly moving into a one-way street for central bank policy. Central bankers are essentially engaging in a sophisticated version of competitive devaluations. The Fed does QE, the BOE does QE, the ECB does QE (but claims it doesn’t), the SNB and BOJ and now the RBA does QE. It is a one-way street because whoever stops printing first will see his currency shoot higher as investors flock to the harder currency. The chart below shows what has happened to the Aussie dollar over the last decade versus the USD. While the strengthening trend was interrupted by the 2008 flight-to-quality, it quickly resumed. Since that time, it has risen roughly 50% (and 100% overall since 2001).

Now, a strong currency is good. It makes foreign goods cheaper and raises the standard of living overall. However, it also hurts exports, which slows the economy and results in visible layoffs while the economy adjusts. There’s only so much of this a country’s politicians are willing to take, and it seems Australia may have reached its limit.

If everyone is printing, exchange rates may not move at all. It has frustrated many dollar bears that the greenback hasn’t declined under the profligate printer Bernanke; printing money is supposed to destroy a currency. It has done so repeatedly over the course of history, and it happens for obvious reasons: when you get a bumper crop of something, its price tends to fall. More supply induces lower prices. In this case, it induces a lower price of a currency unit in terms of other currency units.

But that only happens if the relative supply of a currency is changing. If everyone is printing at roughly the same pace, there is no reason that currencies should move at all relative to each other. They should all fall relative to non-printers, or to hard assets. And that’s why it’s even more incredible that commodities are not shooting higher. Yet.

Those effects, in my view, absolutely swamp in importance the weak growth news we’re getting these days. Today, the Philly Fed report and Initial Claims were both quite weak, but the data is going to be polluted by hurricane Sandy for a while and hard to interpret. I don’t think the hurricane had anything to do with this story, or its timing for that matter:

FHA Needs Bailout From Treasury to Plug Budget, Bachus Says

“Nov. 15 (Bloomberg) — The Federal Housing Administration will need billions of dollars in aid from the U.S. Treasury before the end of the year to fill a financial hole caused by defaults on mortgages it insures, House Financial Services Committee Chairman Spencer Bachus said today.

“… The agency is “burning through” its last $600 million and FHA officials have briefed him that they will need a financial backstop within a month, the Alabama Republican said during a press conference in Washington.”

So, we are trying to figure out how to raise a trillion dollars over ten years to start closing the budget gap, but it helps to remember that there are other groups who are going to be bellying up to the bar for a hit of government help. The FHA, the postal service (-$15.9bln this year, although they expect to lose only $7bln next year), probably California before long. We’d better get our act together quickly…but as yet, there is no sign of it. Nice of Bachus to wait until less than a month before the FHA runs out of money to mention this, by the way.

And I haven’t even mentioned the sudden explosion of violence in Israel, which doesn’t give the impression of a fire that will quickly burn out. It may not spin out of control, either, but it bears watching very closely since our influence in the region has significantly ebbed since the change of control in Egypt, our exit from Iraq, and our distancing from Israel.

I don’t think 2013 is shaping up to be a very fun year. But we’re not there yet!

The Good News On Inflation Seems Likely to End

October 15, 2012 4 comments

In case you haven’t yet heard, congratulations are due to the EU – the recipient of this year’s Nobel Peace Prize. Hey, don’t laugh; they need the money. And don’t click over to the news, where you may find pictures of riots in various places as the peace and prosperity (which, as we now know, was purchased on credit that can never be repaid) is taken away. That’s an inconvenient truth…which, ironically, won the price in 2007. I think I see a pattern.

Back in the real world, American-style capitalism (such as it is) showed some temporary vigor today with Retail Sales announced stronger than expected (+1.1% ex-autos, with a +0.2% revision, versus +0.7% expected). That’s not a huge beat, but the three-month change of 3.04% is the highest rate since late 2005. To be fair, some of that is a payback from a weak Q2, and the year-on-year number is still well below the pace of 2011 and parts of 2010. Optimists, however, will see a glimmer of hope in this number, even if kick-starting the economy through the channel of retail sales isn’t exactly the “high-quality” growth we would like to see.

Speaking of high-quality growth, the bad news today was that the Empire Manufacturing figure was weaker-than-expected, bouncing only feebly from last month’s figure (which was itself the weakest since early 2009).

The equity market responded to the data (or, more likely, to the notion that last week’s mild selloff makes stocks “cheap”) with a healthy +0.8% rally albeit on weak volume. Commodities were smashed for the second day in a row, somewhat inexplicably since the dollar didn’t strengthen and there wasn’t a lot of economic news out today.

Indeed, Monday was pre-climactic, as Mondays often are but this week in particular. For tomorrow is the monthly CPI report.

Last month, recall, core inflation printed +0.052%, a very weak surprise that pulled the year-on-year figure to 1.9%. It was especially surprising since Housing, the heaviest-weighted index, accelerated. The number was dragged down by Apparel, and the quirky drags from August did not all get reversed.

The consensus Street estimate for September CPI is +0.5% headline, +0.2% core. The consensus for the year/year changes is +1.9% for the headline, and an uptick to +2.0%.

An uptick on core is all but assured, because last September’s change in core was only +0.08%. The year-on-year number will print +2.0% if the month-on-month change is only +0.11% tomorrow. In fact, if the monthly figure for core is +0.21% (the monthly changes for March through June of this year averaged +0.22%), year-on-year core inflation will spring all the way back up to +2.1%. That would, incidentally, really help the Treasury sell the $7bln in 30-year TIPS they have to sell this week.

There is some reason to expect these upticks. As I’ve mentioned, the weak inflation data from a year ago is one reason, but even the nature of the last few months’ changes suggest that we are not likely to be in the midst of a broad slowdown in inflation. Median inflation is as high above core inflation as it has been for several years. Housing appears to be accelerating, not decelerating. And, needless to say, global central banks continue to ease aggressively. M2 has begun to re-accelerate and is back to +7% y/y (+8.2% annualized over the last 13 weeks, which is the highest rate since January).

If core comes in weak again tomorrow, it will create a difficult analytical dilemma. A string of unusually weak numbers at the same point of the year in consecutive years could point to faulty seasonal adjustment. Since other economic data have been having difficulty with seasonal adjustment, we would have to consider that possibility. But the more likely interpretation would be that something about the underlying dynamic of inflation has changed, and price increases are decelerating again. I don’t think this is going to happen, but if it does I will have to address that possibility.

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