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Is Inflation Dead…Again?
I am not the first person to point out that the stock market, at outlandish multiples, is not behaving consistently with commodities markets that are flashing imminent depression. If we insist on anthropomorphizing the markets, it really makes no sense at all unless we posit that “the market” suffers from a split personality disorder of some kind. But that sort of thing happens all the time, in little ways.
But here is something that seems very weird to me. Prices of short-dated inflation swaps in the interbank market suggest that NSA headline inflation is going to rise less than 0.9% for the entire balance of 2023 (a 1.45% annualized rate). And actually, most of that rise will be in the next 2 months. The market is pricing that between June’s CPI print and December’s CPI print the overall price level will rise 0.23%…less than ½% annualized!
Now, eagle-eyed readers will notice that there was also a flat portion of 2022, covering roughly the same period. Headline inflation between June and December last year rose only 0.16%, leading to disappointing coupons on iBonds and producing proclamations that inflation was nearly beaten. Here’s the thing, though. The second half of 2022 it made perfect sense that headline inflation was mostly unchanged. Oil prices dropped from $120/bbl the first week of June, to $75 by mid-December. Nationwide, average unleaded gasoline prices dropped from $5 to $3.25 during that time period.
A comparable percentage decline would mean that gasoline would need to drop to $2.32 from the current $3.58 average price at the pump. To be sure, the gasoline futures market is in much steeper backwardation than normal, with about 44c in the curve from now until December compared with 28c from June to December 2024.[1] So that can’t be the whole source of this insouciance about inflation. If gasoline does decline that much, the inflation curve will be right…but there’s an easier way to trade that, and that’s to sell Nov or Dec RBOB gasoline futures.
So the flatness must be coming from elsewhere. It can’t be from piped gas, which has recently been a measurable lag, because Natural Gas prices have already crashed back to levels somewhat below the norm of the last 10 years. Prices of foodstuffs could fall back more, which would help food-at-home if it happened, but food-away-from-home tracks wages so it’s hard to get this huge of an effect from food.
Ergo…this really must be core. Except there, the only market where you can sort of trade core inflation rather than backing into it, the Kalshi exchange, has the current prices of m/m core at 0.35% in May, 0.32% in June, 0.57% in July, 0.45% in August, 0.35% in September, 0.18% in October, and 0.22% in November. (To be sure, those markets especially for later months are still fairly illiquid but getting better). That’s not drastically different from the 0.41% average over the last six months.
Markets, of course, trade where risk clears and not necessarily where “the market thinks” the price should be. I find it hard to understand though who it is who would have such an exposure to lower short-term prices that they would need to aggressively sell short-term inflation…unless it is large institutional owners of TIPS who are making a tactical view that near-term prints would be bad. Sure seems like a big punt, if so.
Naturally, it’s possible that inflation will suddenly flatline from here. I just don’t feel like that’s the ‘fair bet’. That is after all a key function of markets: offer attractive bets to people who don’t have a natural bias in the market in question, to offset the flows of those people who are willing to pay to reduce their risk in a particular direction. (This should not be taken to suggest that I don’t have a natural bias in the market; I do.)
There’s another reason that this matters right now. Recently, markets have also been starting to price the possibility that the Federal Reserve could continue to hike interest rates, despite fairly clear signals from the Chairman after the last meeting that a ‘pause’ was in the offing. That certainly makes sense to me, since 25bps or 50bps makes almost no difference and after one of the most-aggressive hiking cycles in history, putting rates at approximately long-term neutral at the short end, it would seem to be prudent to at least look around. If, in looking around, the Fed were to notice that the balance of the market is suggesting that inflation has a chance of going instantly and completely inert, it would seem to be even stranger to think that the FOMC is about to fire up the rate-hike machine again for another few hikes.
[1] N.b. – June to December on the futures curve isn’t the exact right comparison since prices at the pump lag wholesale futures prices, but it gives you an idea.
Summary of My Post-CPI Tweets (April 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 May (April’s figure).
- A reminder: At 8:30ET, when the data drops, I 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.
- After the tweeting dies down, 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 http://inflationguy.podbean.com.
- Thanks again for subscribing!
- The market backdrop going into this one is very different from last month, when we were still dealing with panicky banking-collapse stuff. There are still some people selling that story, but there’s no real meat to it.
- But breakevens have come in, and real yields risen. And the Fed has tightened for what is likely the last time in the cycle. Some people are REALLY sold on the deflationary-depression scenario but right now shaping up to be a mildish recession with continued high inflation.
- That’s going to put the Fed in a classic bind, but with this Fed…maybe not really. I’ll say more about what I think about the Fed (big picture) in our Quarterly next week (subscribe at https://inflationguy.blog/shop/) but in sum I think O/N rates stay high all year.
- Next year, when inflation is still not coming down to their target (I think), they’ll have some decisions to make but for now, a mild recession won’t get them easing aggressively as they did under Greenspan/Bernanke/Yellen. It’ll be Silence of the Doves.
- The forecasts this month have amazing agreement in the headline figure, which is interesting because Kalshi and economists’ estimates have been rising meaningfully over the last week or so. I’ve been pretty consistent. I agree on headline. I’m significantly higher in core.
- Here’s why.
- Last month, core was a little soft, but not a ton. That in itself was remarkable, because rents decelerated a LOT m/m. And used cars was also a drag despite private surveys suggesting it should have been an add.
- So the fact that core was just a LITTLE soft was pretty amazing. Median (a better measure) dropped a lot because of rents, but the fact that core was resilient tells you there were some long-tail upsides. Diffusion indices are showing strongly that the peak is in, but…
- …but Core Goods having possibly bottomed (Used Cars should FINALLY deliver this month) means that the deceleration is going to be all rents and core services from here. So same stories but getting bigger going forward as the turn in Core Goods runs its course.
- And I do not believe in the sudden deceleration in rents – because nothing in rents happens suddenly. I think all the folks who have been looking for it for a while are succumbing to confirmation bias in thinking this is real.
- Maybe they’re right – another weak rents number will mean a lot to me. But I took note that the y/y rents figures still rose, which means that last year in the same month it was even weaker! That smacks to me of seasonal-adjustment issues.
- That doesn’t explain the full deceleration from 0.7 to 0.5 in rents, but it would explain some. I think we’re going to bounce back, but if we get another 0.48% on primary and OER, I’ll take notice.
- I also want to look at Food Away from Home. I wrote about this last week https://inflationguy.blog/2023/05/04/food-inflation-served-hot-and-cold/ – Food At Home and Food Away from Home have now diverged, and the FafH is tied more closely to wages.
- So: Core ex-rents, but also rents. And Food Away from Home as part of the Core ex-rents-imbued-with-momentum-from-wages meme.
- Do note that y/y core will decline even if we get my number (0.46%), and likely median also. It will help cement the idea the Fed is going to wait for a while.
- (Then again, last month I said I didn’t think they’d do 25bps because 25bps just doesn’t matter. But now we also have them signaling as much. It’ll take a lot to get them to move either direction soon.)
- Honestly, I need to step back and watch for a while myself. So far, the last few years have been relatively easy to call. But now we have a rapid rebound in velocity (which I expected) and declining M2 (which I did not).
- For the trajectory of inflation beyond this summer, we need to know which of these is going to win. I have trouble believing M2 will keep declining, especially as money demand gets adjusted to the new interest rate regime. But it’s an open question.
- And a very important question! And one that will not be resolved today! But it will be an interesting report I think – I’ll be back with more at 8:31ET. Good luck.
- okay. 0.409 on core…pretty darn good work by economists and Kalshi!
- Very nice jump from Used Cars…+4.5% m/m. So that’s an overdue catchup.
- OER 0.54 and Primary Rents +0.56 m/m. That’s a jump compared to the prior month, but quite a bit lower than trend. Some deceleration is probably happening, but last month was an illusion as to how much, probably from seasonal quirks.
- Core goods rose to 2.0% y/y (largely on the strength of the aforementioned Used Cars) and Core services fell to 6.8% y/y.
- Here is Core. This month right in trend. 0.4% is still almost 5% per year!
- Median retained most of its deceleration…but didn’t decelerate further m/m. Oddly, also 0.41% as with core. Normal warning: looks like one of the regional OERsis the median category – ergo, my estimate might be off since I have to guess at seasonals.
- Medical Care was the usual drag, but everything else was positive. There were some drags, but mainly the story here is rent deceleration.
- I noted the acceleration in core goods, which is mostly used cars this month. But I think the macro trend that we’ve seen most of the core goods deceleration is in place. Will it bounce to 5%? Probably not. But it’s no longer going to drag overall inflation lower.
- Primary Rents have officially peaked. OER, not yet. Soon. As with the overall inflation numbers, which peaked but won’t be declining as much as people were expecting, so it will be with rents.
- So in the so-called COVID categories, Airfares were -2.5% m/m; Lodging Away from Home -3.0%; Food @ Home -0.17%(sa) and Food Away from Home +0.37%(sa). This latter is a noticeable slowdown.
- Piece 1: As-expected look. I thought Food would add 0.03% to CPI but it actually added about 0.02% it appears. Nothing surprising in this.
- Piece 2 is Core Commodities – already commented on this.
- Core Services less ROS – this is starting to look less-horrible. Still, 5% isn’t lovely but this is the wage-driven piece. Taken together with the Food-Away-from-Home improvement, there seems to be some signs that the wage-price feedback is slowing some. And that’s good news.
- And rents are still high. While the Core Services piece is showing decent signs that it may have peaked, a deceleration in rents is still an article of faith. It will happen, but I don’t see it falling to 2% or lower, which is where some people think it’s going.
- (Some people still think housing is going to collapse. It’s not going to. Prices are already starting to rise again.)
- Core ex-housing went from 3.81% y/y to 3.75% y/y. Still pretty high even with the drag from core goods. Overall, the picture is IMPROVING but not good yet.
- …and that story, actually, supports the idea of a Fed pause. “We finally turned back the attackers from the walls. Now let’s wait and see if they regroup or if the battle is over.” That’s the wise course.
- You know, I gave economists a bit too much credit earlier. Their HEADLINE guesses were 0.41. Their core numbers were lower. We were about equally off. I was too high, because I thought rents would rebound more than they did. They were too low, for whatever reason.
- Sort of interesting that Recreation was +0.5% m/m. That’s a heterogenous category so it usually doesn’t do a lot. This month, Video and Audio was +0.45% (nsa) and Pets were +1.82%(nsa). Those are the two largest pieces of Recreation. Interesting bump from pets.
- Within Medical Care, Doctors’ Services was a drag and now is just +0.27% y/y! But Pharma added 0.42% m/m. The insurance drag continues to be what keeps that category inert (and, actually, it’s in core services ex rents so it’s also holding down “Supercore” some).
- Nothing really illuminating amongst the biggest gainers/decliners. Core categories Public Transportation was -46% (annualized monthly, which is what goes into median), Car/Truck rental -33%, Lodging Away from Home -30%.
- Gainers: Motor Vehicle Insurance +18%, Misc Pers Svcs +33%, Used Cares +69%. Actually some people say the insurance part is likely to continue for a bit. Lots of theft and higher car prices means that insurance rates need to rise too because cost-of-replacement is higher.
- Diffusion index down to 14!
- Okay, let’s try a conference call. Bottom line is I don’t think this figure is as good as stocks seem to think. But it DOES support the Fed-on-hold thesis. Still, it was a little higher than expected. Here is the conference number. I’ll start in 7 minutes.
Today’s number, while higher than expected on core by a little bit, was roughly in line with expectations. I was higher on my forecast than the consensus, because I thought rents would bounce back further and they didn’t; others were too high because they thought rents would keep dropping. I think that’s the main difference. Most of the rest of what is happening in the number was roughly what people expected. It was nice to see Used Cars bounce, since they were about 2 months behind what the private surveys were promising us – so not really a surprise.
While this is an expected number, that’s not saying it’s a wonderful figure. 0.4% monthly on core CPI…which is where we have been for the last 5 months…still gets you only to about 5% core for the year. That’s not where the Fed wants to see it.
On the other hand, it’s also clearly off the boil and most of the CPI is decelerating at least a little bit. It’s nice to see core services ex-rents (so-called “supercore”) decelerating, although we should remember that includes Health Insurance which is in the midst of a year-long mechanical adjustment that will swing the other way in about 6 months. But overall, the arrows are pointing in the right direction.
That’s distinctly unlike what was happening with the “transitory” nonsense, when the great bulk of the CPI was moving in the wrong direction – and not just the transitory pieces. So this is welcome.
And it supports the Fed’s decision to pause in rate hikes while continuing to slowly reduce its balance sheet. As long as the numbers continue to decline and nothing blows up that demands the Fed’s immediate attention, rates will stay on hold. I don’t think a minor recession, with inflation at 5%, will get the Fed to ease. Now, 6 months from now when it becomes obvious that inflation isn’t going back to the Fed’s target they’ll have some decisions to make, but that’s a story that will play out in slow motion. For now, we have a figure that supports ex-post-facto what the Fed chose to do this month.
Summary of My Post-CPI Tweets (March 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!
Note that since the post-8:30am charts were tweeted rapidly and commentary added to it by later re-tweets, the summary below is rearranged to eliminate the redundancy and improve readability.
- Welcome to the #CPI #inflation walkup for April! (March’s CPI figure)
- A reminder to subscribers of the tweet schedule: At 8:30ET, when the data drops, I 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.
- There is a small wrinkle this month: I am going to be a guest on a Twitter space hosted by @Unusual_Whales while I’m busy tweeting. That shouldn’t impact you subscribers. Tune in if you want!
- After the tweeting dies down, 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 .
- I will also record that call for later call-in if you’re not available (and of course later there will be my tweet summary, and my podcast, so you can consume my opinions however suits you).
- Thanks again for subscribing! And now for the walkup.(Some of this I’ve related over the last few days and am summarizing/repeating here.)
- The whole banking-collapse thing seems to have blown over for now, but interest rates are still lower than they were a month ago. And breakevens are higher. This is one reason stocks are doing well – steady infl expectations and lower real yields is a sweet cocktail for equities.
- It’s also likely fleeting, but it helps explain why the market is doing so well for now.
- Today’s CPI print might be very interesting. There are a lot of crosscurrents and everyone seems to be interpreting them differently. The spread isn’t super wide, but the swaps market is almost a full 0.1% below economists’ estimate for headline inflation.
- (The swaps market tends to be more accurate than economists in this regard, but I hope this month they aren’t because I have the over.)
- The drag on inflation is not going to come from food; raw foods are again spiking and there’s still the wage issues for food-away-from-home. I have gasoline adding 3bps, while some others see it flat or subtracting slightly. But the big drag is piped gas.
- As I noted on Monday, piped gas is part of household energy and normally it is too small to matter. But the massive recent decline pulled down February CPI and should pull down March. I have the effect worth 13bps.
- But also, lower utilities implies that primary rents will have a small tailwind UPWARD and most people will ignore that. The reason it happens is the BLS backs out utilities when rents include utilities, so sharply lower utilities implies slightly higher rents.
- Anyway, that’s the big drag. But why does the swap market see it as so much bigger than economists do? That’s odd. Or it could imply the Street sees a real drag on core…but that’s a hard sell right now.
- Last month, Used Cars did not rise along with the private indices, but those indices rose again and so it’s likely we’ve seen the end of the price retracement from Used Cars. Indeed, Core Goods is showing signs that it is not going to gently go to -1%.
- Heck, in my view the economists are too low on core anyway – they’re 0.05% below the traders on Kalshi’s core inflation market, and 0.1% below me. Is it possible we can get 0.4% or lower on core? Sure. But there are a lot of upward pressures.
- This chart shows median wages minus median CPI. For years, it has been stable at about 1%, other than in the aftermath of disaster. Right now it isn’t, b/c Median CPI is still rising while median wages have ebbed although just a little.
- Now, this chart might say something different to you than to me. My interpretation is that employees will fight against further declines in wage growth, until inflation comes down. But you might argue that this gives room for CPI to decelerate.
- Since we are focused on the wage-price feedback loop in core-services-ex-shelter (as I was saying long before the cool kids dubbed it “supercore”), the resolution of this question is very, very important.
- Anyway, I think we will see 0.5% on core inflation. But even if we only see 0.4%, y/y core will rise. Not many will get too exercised about that, though, because the easy comps are coming. By May, we will likely see y/y core start declining again.
- Of course, I’m focused on median CPI, which is still hitting new highs. But it also should start ebbing soon. As always, the question is “how much” and I continue to say “not as much as the market is pricing in.” With breakevens in the low 2s, they’re very cheap in my view.
- We will see what the number brings. But unless it’s even higher than I have it, and with an alarming breadth, I think the Fed is likely done hiking. As I said last month, 25bps doesn’t do anything at this stage anyway.
- But +0.5% on core will be taken very badly by the stock market, I think, and probably pretty bad for bonds as well. Everyone wants fervently to believe with the inflation swaps market that this inflation episode is over.
- Doesn’t look like it to me. Not yet! Good luck today and I’ll be back live at 8:31ET.
- Definitely better than expected. Swap market as usual is closer than economists…and core was actually was .053%
- m/m CPI: 0.053% m/m Core CPI: 0.385%
- Kneejerk observations: Used Cars dragged again (?). RENTS WERE SHARPLY LOWER FROM TREND. Medical Care was a drag.
- Last 12 core CPI figures
- Inflation Swap market gets closest-to-the-pin. In fact, Headline rounded UP to 0.1%. Core was actually kinda close to expectations (but lower than I thought!).
- M/M, Y/Y, and prior Y/Y for 8 major subgroups
- The big story here is going to be housing. Housing 0.3% m/m is a big decline. Some of that is piped gas, but…
- Core Goods: 1.53% y/y Core Services: 7.13% y/y
- Now, notice that core goods turned up. That’s even though CPI for Used Cars declined. Again, that is unexpected since private surveys have said used car prices are going back up.
- Primary Rents: 8.81% y/y OER: 8.04% y/y
- …still not peaked, but peaking? Actually y/y higher this month, so it’s possible there’s some seasonality issue.
- Further: Primary Rents 0.49% M/M, 8.81% Y/Y (8.76% last) OER 0.48% M/M, 8.04% Y/Y (8.01% last) Lodging Away From Home 2.7% M/M, 7.3% Y/Y (6.7% last)
- (This really is the big story today. Actually, core being that high despite housing…is surprising.)
- Actually core ex-shelter rose very slightly to 3.81% y/y.
- Here is my early and automated guess at Median CPI for this month: 0.401%
- Some ‘COVID’ Categories: Airfares 3.96% M/M (6.38% Last) Lodging Away from Home 2.7% M/M (2.26% Last) Used Cars/Trucks -0.88% M/M (-2.77% Last) New Cars/Trucks 0.38% M/M (0.18% Last)
- Piece 1: Food & Energy: 2.63% y/y
- A lot of the recent plunge here is piped gas…which is just about done.
- Piece 2: Core Commodities: 1.53% y/y
- Piece 3: Core Services less Rent of Shelter: 5.53% y/y
- Supercore coming down! But just a little. Still not sure this is thrilling enough for the Fed.
- Piece 4: Rent of Shelter: 8.26% y/y
- The distribution here is going to be really important. Unfortunately my data scraper is having a strange issue and that feeds my distribution stuff. Obviously the middle shifted, which is why median CPI decelerated, but I want to see the diffusion stuff. Tech delay for me…
- Piped gas actually fell only -8.0% m/m NSA, versus -9.3% last month. I thought it was going to be greater, so there was a slightly SMALLER drag on headline than I expected there.
- Also encouraging is that Food and Beverages was only 0.02% m/m. I’m a little surprised by that, but it’s good news. Non-core of course.
- I will say the bottom line is that IF the housing data is real, then this is a really happy inflation number. But outside of the housing data…core was still 0.4%! So not GREAT data. The distribution data will be important, which is why it’s even more frustrating atm.
- I can also report that the biggest decliners in core m/m were Car/Truck Rental (-37% annualized monthly change), Energy Services (-24%), Misc Personal Goods (-14%) and Used Cars/Trucks (-10%). Latter I’ve already mentioned is really odd.
- Biggest gainers are Public Transportation (+46%), Lodging Away from Home (+38%), Motor Vehicle Insurance (+16%), Mens/Boys Apparel (+13%), and Personal Care Products (+10%).
- We are obviously not going to have the conference call today…too late to be of any use. But I have some thoughts anyway about the Fed and the positive market reaction.
- Totally understand the positive market reaction. The headline figure ALMOST rounded to unchanged, and core was a little light although not very much. The rally makes sense.
- The dive in longer-term breakevens doesn’t, as much. If you think this big deceleration in shelter is real then it means inflation is probably peaking even in a median sense…but long-term breakevens already impound a 2.2% average inflation rate.
- There is nothing to make me think that rents are going to go flat, with median wages rising at 6% and home prices advancing again. This is not 2009-10 and there is still a big shortage in shelter and plenty of income to support rents. So 2%…is still very unlikely IMO.
- That said, let’s think about the Fed. Start from the premise that their model is assuming high-frequency rent data is predictive, even though it’s been predicting rent deceleration for a long time and this is the first sign of it.
- But if your null is “I’m waiting for rental inflation to turn” and then you see a sign of a turn…well, it’s bad econometrics to “confirm” a hypothesis but that’s how humans work. I think this makes a further hike fairly unlikely unless the Fed wants to make a symbolic gesture.
- With Fed funds at 5% and at least SOME concerns about banking, the juice doesn’t seem to be worth the squeeze to hike again. Which is, of course, why markets are ebullient today.
- I don’t think we’re out of the woods on inflation yet. I should have missed this number by a LOT more than I did given I was 0.25% off on the largest part of core. It means the strength is still broad.
- But the question has never been “WILL inflation go back down someday.” It has been about WHEN. And how far…but not so many people are questioning that when it goes back down, it’ll go to 2%.
- There’s just no natural reason that should happen. It’s a pleasant wish, but there’s no mechanism to cause inflation to go to the Fed’s target naturally. And as I’ve shown recently, there’s actually not much evidence that inflation mean reverts at all…even if the mean IS 2%.
- So…good news today, and the Fed will take it as such. As will markets. But here is the chart of m/m primary rents. This doesn’t seem entirely plausible to me. Give me another month or two and I’ll be a believer.
- Anyway, thanks for tuning in, and bearing with me despite the tech issues. I will update the diffusion index when I get the problem fixed.
Today’s inflation data was clearly positive, but how positive it is depends on whether rents are suddenly decelerating in the way the data says they did in March. That seems implausible to me, but it’s possible. As I said above, the question was never whether inflation would stop going up, but when, and how far it falls back. We thought median inflation had peaked in September, and then it went higher. It now looks like it has peaked again – and this is likely the case. But we’ve been fooled before.
Here’s a crucial point to keep in mind, though, when we are predicting Fed action. What’s their null? If my null hypothesis is that inflation is unlikely to slow below 4%, say, then I need a lot more evidence before I stop hiking rates. I know that many of you reading this fall into that camp. But does that mindset characterize the central bank’s thinking? What I think we know about the Fed right now is that they are moderately (but only moderately) concerned about the banking system; they are concerned about core services ex-shelter because of the wage-price feedback loop I’ve been highlighting since long before they did; and they believe that higher-frequency data on rents suggests that rent inflation should be ebbing ‘soon.’ Chairman Powell has said all of these things.
So if that’s the case, how does it frame today’s data?
There’s nothing new in this about banking. But there does seem to be information which would confirm what I am assuming to be the Fed’s ‘priors’ about rents. To me, that one month doesn’t mean a lot, but to someone who has been expecting a deceleration, this probably looks like one. There’s also nothing here about wages per se, although “supercore” is decelerating some. However, I think the Fed already believes wages are declining, because they tend to focus more on “Average Hourly Earnings” from the Employment report. That’s a terrible measure, but it’s widely used. (In fact, for most economic data you want to ignore “average” measures if the composition can change a lot from report to report, like the employment report can). Here’s a chart of AHE, against my preferred measure of median wages of continuously-employed persons, from the Atlanta Fed (in blue).
If I’m right and the Fed is focusing on the black line rather than the blue line, and I’m right about how they are thinking about rents, then I think if you took a poll of Fed thinkers you’d find that most of them think they’ve broken the back of inflation and the only question is how quickly it gets back to 2%. I suspect most of them would prefer to keep rates where they are, and not lower them quickly, because you want to keep the pressure on…but I believe the argument for pushing rates a lot higher is substantially weakened by recent data – that is, if you share those priors.
My view is unchanged, although I will keep an eye on rents. My model has them coming down to 4% or so, but then my model never had them getting much higher than 5%. Some of that is an overshoot thanks to the correction after the eviction moratorium was lifted, but a lot of that in my opinion is supported by the big shortage of shelter and by strong wage growth. I’m not sure why we’d expect rents to fall drastically, especially if a landlord’s cost of financing and of maintenance are still rising. Overall, I think inflation is in retreat thanks to a contracting money supply although that is offset by the rebound in money velocity. But I don’t expect inflation to get to 2% any time this year or in 2024. More likely, we will settle in around 4%-5% later this year. That’s my null hypothesis!
Summary of My Post-CPI Tweets (February 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! To be sure, the importance of this data point in the short run is much less than it was a week ago, but it would be a mistake to lose sight of inflation now that the Fed is likely moving from QT to QE again.
- A reminder to subscribers of the tweet schedule: At 8:30ET, when the data drops, I 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 (recently it’s been 9:30ish) 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 .
- I am also going to try and record the conference call for later. I think I’ve figured out how to do that. If I’m successful, I’ll tweet that later also.
- Thanks again for subscribing! And now for the walkup.
- This picture of the last month has changed quite a bit over the last few days! Suddenly, rates have reversed and the nominal curve is steepening. The inflation market readings are…of sketchy quality at the moment.
- Now, the swap market has also re-priced the inflation trough: instead of 2.65% in June (was in low 2s not long ago), the infl swap market now has y/y bottoming at 3.34% b/c of base effects before bouncing to 3.7% & then down to 3.15% by year-end. I think that’s pretty unlikely.
- Let’s remember that Median CPI reached a new high JUST LAST MONTH, contrary to expectations (including mine). The disturbing inflation trend is what had persuaded investors…until late last week…that the Fed might abruptly lurch back to a 50bp hike.
- These are real trends…so I’m not sure why economists are acting as if they are still certain that inflation is decelerating. The evidence that it is, so far at least, is sparse.
- Also, this month not only did the Manheim used car index rise again, but Black Book (historically a better fit although BLS has changed their sampling source so we’re not sure) also did. I have that adding 0.04%-0.05% to core.
- But maybe this is a good time to step back a bit, because of the diminished importance of this report (to be sure, if we get a clean 0.5%, it’s going to be very problematic for the Fed which means it should also be problematic for equity investors).
- Over the last few days we’ve read a lot about how banks are seeing deposits leave for higher-yielding opportunities. This is completely expected: as interest rates rise, the demand for real cash balances declines.
- You may have heard me say that before. But it’s really Friedman who said that first: velocity is the inverse of the demand for real cash balances. DEPOSITS LEAVING FOR HIGHER YIELDS IS EXACTLY WHAT HIGHER VELOCITY MEANS.
- And it is the reason for the very high correlation of velocity with interest rates.
- So the backdrop is this: money may be declining slightly but velocity is rebounding hard. Exactly as we should expect. Our model is shown here – it’s heavily influenced by interest rates (but not only interest rates).
- And if the Fed is going to move from its modest QT to QE, especially if they don’t ALSO slash rates back towards zero, then the inflationary impulse has little reason to fade.
- You know, I said back when the Fed started hiking that they would stop once the market forced them to. What has been amazing is that there were no accidents until now, so the market let them go for it. And in the long run this is good news – rates nearer neutral.
- But we have now had some bumps (and to be fair, I said no accidents until now but of course if the FDIC and Fed had been doing their job and monitoring duration gaps…this accident started many many months ago).
- With respect to how the Fed responds to this number: it is important to remember that the IMPACT ON INFLATION of an incremental 25bps or 50bps is almost zero. Especially in the short run. It might even be precisely zero.
- But the impact of 25bps or 50bps on attitudes, on deposit flight, and on liquidity hoarding could be severe, in the short run. On the other hand, if the Fed stands pat and does nothing but end QT, it might smack of panic.
- If I were at the Fed, I’d be deciding between 25bps and 0bps. And the only decent argument for 25bps is that it evinces a “business as usual” air. It won’t affect 2023 inflation at all (even using the Fed’s models which assume rates affect inflation).
- Here are the forecasts I have for the number – I tweeted this yesterday too. I’m a full 0.1% higher on core than the Street economists, market, and Kalshi. But I’m in-line on headline. So obviously as noted above I see the risks as higher.
- Market reactions? If we get my number or higher, it creates an obvious dilemma for the Fed and that means bad things for the market no matter how the Fed resolves that. Do they ignore inflation or ignore market stability?
- If we get lower than the economists’ expectation (on core), then it’s good news for the market because MAYBE it means the Fed isn’t in quite such a bad box and can do more to support liquidity (read: support the mo mo stock guys).
- So – maybe this report is important after all! Good luck today. I will be back live at 8:31ET.
- Well, headline was below core!
- Waiting for database to update but on a glance this doesn’t look good. Core was an upside surprise slightly and that was with used cars a DRAG.
- m/m CPI: 0.37% m/m Core CPI: 0.452%
- Last 12 core CPI figures
- So this to me looks like bad news. I don’t see the deceleration that everyone was looking for. We will look at some of the breakdown in a minute.
- M/M, Y/Y, and prior Y/Y for 8 major subgroups
- Standing out a couple of things: Apparel (small weight) jumps again…surprising. And Medical Care is back to a drag…some of that is insurance adjustment (-4.07% m/m, pretty normal) and some is Doctors Services (-0.52% m/m), while Pharma (0.14%) only a small add.
- Core Goods: 1.03% y/y Core Services: 7.26% y/y
- We start to see the problem here: any drag continues to be in core goods. Core goods does not have unlimited downside especially with the USD on the back foot. Core services…no sign of slowing.
- Primary Rents: 8.76% y/y OER: 8.01% y/y
- And rents…still accelerating y/y.
- Further: Primary Rents 0.76% M/M, 8.76% Y/Y (8.56% last) OER 0.7% M/M, 8.01% Y/Y (7.76% last) Lodging Away From Home 2.3% M/M, 6.7% Y/Y (7.7% last)
- Last month, OER and Primary Rents had slipped a bit and econs assumed that was the start of the deceleration. Maybe, but they re-accelerated a bit this month. Lodging away from home a decent m/m jump, but actually declined y/y so you can see that’s seasonal.
- Some ‘COVID’ Categories: Airfares 6.38% M/M (-2.15% Last) Lodging Away from Home 2.26% M/M (1.2% Last) Used Cars/Trucks -2.77% M/M (-1.94% Last) New Cars/Trucks 0.18% M/M (0.23% Last)
- FINALLY we see the rise in airfares that has been long overdue. I expected this to add 0.01% to core; it actually added 0.05%. Those who want to say this is a good number will screech “outlier!” but really it’s just catching up. The outlier is used cars.
- Both the Manheim and Black Book surveys clearly showed an increase in used car prices. But the BLS has recently changed methodologies on autos. Not clear what they’re using. Maybe it’s just timing and used will add back next month. We will see.
- Here is my early and automated guess at Median CPI for this month: 0.634%
- Now, the caveat to this chart is that I was off last month (the actual figure reported is shown), but that was January. I think I’ll be better on February. I have the median category as Food Away from Home. This chart is bad news for the deceleration crowd, and for the Fed.
- Piece 1: Food & Energy: 7.97% y/y
- OK, Food and Energy is decelerating, but both still contributed high rates of change. Energy will oscillate. It is uncomfortable that Food is still adding.
- Piece 2: Core Commodities: 1.03% y/y
- This is the reason headline was lower than expected. Core goods – in this case largely Used Cars, which I thought would add 0.05% and instead subtracted 0.09% from core. That’s a -14bps swing. +5bps from airfares, but health insurance was a drag…and we were still >consensus.
- Piece 3: Core Services less Rent of Shelter: 5.96% y/y
- …and this is the engine that NEEDS to be heading sharply lower if we’re going to get to 3.15% by end of year. It’s drooping, but not hard.
- Piece 4: Rent of Shelter: 8.18% y/y
- …and I already talked about this. No deceleration evident. As an aside, it’s not clear why we would see one with rising landlord costs, a shortage of housing, and robust wage gains, but…it’s an article of faith out there.
- Core inflation ex-shelter decelerated from 3.94% y/y to 3.74% y/y. That’s good news, although mainly it serves to amplify Used Cars…but look, even if you take out the big add from sticky shelter, we’re still not anywhere near target.
- Equity investors seem to love this figure. Be kind. They’re not thinking clearly these days. It’s a bad number that makes the Fed’s job really difficult.
- Note that Nick Timiraos didn’t signal anything yesterday…that means the Fed hasn’t decided yet. Which means they cared about this number. Which means to me that we’re likely getting 25bps, not 0bps. Now, maybe they just wanted to watch banking for another few days, but…
- …the inflation news isn’t good. As I said up top, 25bps doesn’t mean anything to inflation, but if they skip then it means we are back in QE and hold onto your hats because inflation is going to be a problem for a while.
- Even if they hike, they will probably arrest QT – and that was the only part of policy that was helping. Higher rates was just accelerating velocity. But I digress. Point is, this is a bad print for a Fed hoping for an all-clear hint.
- The only core categories with annualized monthly changes lower than -10% was Used Cars and Trucks (-29%). Core categories ABOVE +10% annualized monthly: Public Transport (+46%), Lodging AFH (+31%), Jewelry/Watches (+20%), Misc Personal Svcs (+17.7%), Footwear (+18%), >>>
- Women’s/Girls’ Apparel (+15%), Tobacco and Smoking Products (+13%), Recreation (+11%), Motor Vehicle Insurance (+11%), Infants’/Toddlers’ Apparel (+11%), and Misc Personal Goods (+10%). Although I also have South Urban OER at +10%, using my seasonality estimate.
- On the Medical Care piece, we really should keep in mind this steady drag from the crazy Health Insurance plug estimate for this year. It’ll almost certainly be an add next year. Imagine where we’d be on core if that was merely flat rather than in unprecedented deflation.
- Let’s go back to median for a bit. The m/m Median was 0.63% (my estimate), which is right in line with last month. The caveat is that the median category was Food Away from Home but that was surrounded by a couple of OER categories which are the ones I have to estimate. [Corrected from original tweet, which cited 0.55% as my median estimate]
- I can’t re-emphasize this enough. Inflation still hasn’t PEAKED, much less started to decline.
- One place we had seen some improvement was in narrowing BREADTH of inflation. Still broad, but narrower. However, this month it broadened again just a bit and the EIIDI ticked higher. Higher median, broader inflation…and that’s with Used Cars a strange drag.
- Stocks still don’t get it, but breakevens do. The 10y BEI is +7bps today. ESH3 is +49 points though!
- We’ll stop it there for now. Conference call will be at 9:30ET (10 minutes). (518) [redacted] Access Code [redacted]. I will be trying to record this one for playback for subscribers who can’t tune in then.
- The conference call recording seemed to go well. If you want to listen to it, you can call the playback number at (757) 841-1077, access code 736735. The recording is about 12 minutes long.
In retrospect, my forecast of 0.4% on seasonally-adjusted headline and 0.5% on core looks pretty good…but that’s only because we got significant downward one-offs, notably from Used Cars. If Used Cars had come in where I was expecting (+1.4%) instead of where it actually came in (-2.8%), and the rest of the report had been the same, then core inflation would have been 0.6% and we would be having a very different discussion right now.
As it is, this is not the number that the Fed needed. Inflation has not yet peaked, and that’s with Health Insurance providing a 4-5bps drag every month. That’s with Used Cars showing a drag instead of the contribution I expected. The “transitory” folks will be pointing to rents and saying that it seems ridiculous, and ‘clearly must decline,’ but that’s not as clear to me. Landlords are facing increased costs for maintenance, financing, energy, taxes; there is a shortage of housing so there is a line of tenants waiting to rent, and wage growth remains robust so these tenants can pay. Why should rents decelerate or even (as some people have been declaring) decline?
Apparel was also a surprising add. Its weight is low but the strength is surprising. A chart of the apparel index is below. Clothing prices now are higher than they’ve been since 2000. The USA imports almost all of its apparel. This is a picture of the effect of deglobalization, perhaps.
So all of this isn’t what the Fed wanted to see. A nice, soft inflation report would have allowed the Fed to gracefully turn to supporting markets and banks, and put the inflation fight on hold at least temporarily. But the water is still boiling and the pot needs to be attended. I think it would be difficult for the Fed to eschew any rate hike at all, given this context. However, I do believe they’ll stop QT – selling bonds will only make the mark-to-market of bank securities holdings worse.
But in the bigger picture, the FOMC at some point needs to address the question of why nearly 500bps of rate hikes have had no measurable effect on inflation. Are the lags just much longer than they thought, and longer than in the past? That seems a difficult argument. But it may be more palatable to them than considering whether increasing interest rates by fiat while maintaining huge quantities of excess reserves is a strategy that – as monetarists would say and have been saying – should not have a significant effect on inflation. The Fed models of monetary policy transmission have been terribly inaccurate. The right thing to do is to go back to first principles and ask whether the models are wrong, especially since there is a cogent alternative theory that could be considered.
Back when I wrote What’s Wrong With Money?, my prescription for unwinding the extraordinary largesse of the global financial crisis – never mind the orders-of-magnitude larger QE of COVID policy response – was exactly the opposite. I said the Fed should decrease the money supply, while holding interest rates down (since, if interest rates rise, velocity should be expected to rise as well and this will exacerbate the problem in the short-term). The Fed has done the opposite, and seem so far to be getting the exact opposite result than they want.
Just sayin’.
Summary of My Post-CPI Tweets (January 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!
- We get the first CPI of 2023 this morning! A fair number of things are changing, but I don’t think the net result is going to be all that large.
- 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 (recently it’s been 9:30ish) 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 .
- Thanks again for subscribing! And now for the walkup.
- First, let’s look at what the market has done over the last month. The front of the curve has gone from incorporating disinflation down to 2%, to disinflation down to 2.65%. Nominal and real yields are both higher as well.
- It’s still hard for me to imagine we could be at 2.65% y/y CPI by this time next year. I suppose it’s possible but a lot of things need to go right.
- For one thing, services inflation needs to stop going up, and reverse hard. Core Goods has already fallen to 2.1% y/y. It’s unlikely to go into hard deflation given deglobalization but even if the strong dollar gets us to 0%, that doesn’t get core to 2.65%.
- Consider, for example, Used Cars. There is some talk this month about the surprising rise in the Manheim index, but Black Book has a higher correlation and BB is still declining. I don’t have Used Cars adding this month.
- However, it’s probably about done dragging…this chart shows the aggregate rise in M2 versus the aggregate rise in Used Car CPI. Yes, prices probably went up ‘too much’ but they’re in the zone of what we SHOULD expect all prices to be doing.
- FWIW, New Car prices haven’t risen nearly so much, but they’ve been steadily accelerating. This month, the BLS shifts to JD Power as its source for new car prices. No real idea what that should do to the report – one hopes, not much.
- Let’s set the overall context, by the way: we have passed the peak of Median CPI (unless something really wacky happens today) and we are going to decelerate from here for a while. Probably to 4-5%.
- But this is likely to happen lots more slowly than people think! Everyone expects rents to collapse. But everyone also expected home prices to collapse. Guess what: neither is going to happen.
- Look, home prices were high relative to rents. But that doesn’t mean home prices need to plunge. What has happened so far has been what you’d expect: home prices have fallen a small amount in nominal space, and rents have gone up a lot. This will probably continue.
- Rents can’t go down a LOT without home prices collapsing – and rents would have to lead that. But I have a hard time understanding how home prices OR rents collapse when you have a few million new heads to put roofs over, and a shortage of housing as it is.
- Now, this month we also have a re-weighting of the CPI basket. It is based on 2021 consumption, which means it partially retraces the prior re-weight which was on 2019-2020 and so had a lot of COVID.
- This means more weight on the sticky categories and less on core goods. Keep in mind that at the margin this only adds a couple of bps per month, but it will also lower inflation volatility a little bit and slow the disinflationary tendency. But just at the margin!
- Putting this together, the consensus economists are a bit stronger this month than they have been. But there are some forecasters out there calling for a MASSIVELY bad print. I don’t see where they get that from. Here are my forecasts vs market.
- I am a little higher, despite the fact that I am not weighting anything to a Used Cars bounce. I keep waiting for Airfares to stop declining in the face of fares that seem massively higher on every route I check. I don’t get that.
- I have to think that the stock market is potentially quite vulnerable to a high number, unless there’s an obvious outlier. We are at high exuberance for the Fed pausing, despite declining earnings.
- OK, that’s all for the walkup. As I am tweeting more stuff intra-month, I think the pre-CPI walkup can be a little shorter on CPI morning. LMK if you disagree as I’m trying to offer a service people think is worthwhile! Good luck today. I will be back live at 8:31ET.
- m/m CPI: 0.517% m/m Core CPI: 0.412%
- ok. Headline and core slightly higher than expected. Consensus was for +0.45% and +0.36%. I was at +0.44% and +0.42%, so closer on core. The NSA was the surprise, at +0.800%, which pushed y/y to 6.41% against expectations for 6.2%. Y/Y core barely rounded up to 5.6%.
- Last 12 core CPI figures
- Second month in a row with an 0.4% core. That means we’re running at just under 5% on core CPI. Not exactly great. But better than it was!
- M/M, Y/Y, and prior Y/Y for 8 major subgroups
- Note the drag on medical care. And note the large jump in Apparel, which goes in the ‘surprise’ category.
- Core Goods: 1.44% y/y Core Services: 7.16% y/y
- Yeah, this isn’t going to get us to a 2.0%-2.5% CPI at year-end. Core Goods continues to decelerate but the deceleration is running out of steam. Core Services is still rising!
- Primary Rents: 8.56% y/y OER: 7.76% y/y
- Further: Primary Rents 0.74% M/M, 8.56% Y/Y (8.35% last) OER 0.67% M/M, 7.76% Y/Y (7.53% last) Lodging Away From Home 1.2% M/M, 7.7% Y/Y (3.2% last)
- Again, this isn’t playing to form if you’re looking for disinflation. It’s consistent with my view, but lots of people will scream about this since “private surveys of rents” show something very different. But it would be a weird conspiracy theory to push inflation HIGHER.
- Do note, the m/m for shelter decelerated a little bit (except for Lodging Away from Home) on a m/m basis. But 0.67% m/m on OER and 0.74% m/m on Primary Rents is still very strong.
- Some ‘COVID’ Categories: Airfares -2.15% M/M (-2.05% Last) Lodging Away from Home 1.2% M/M (1.1% Last) Used Cars/Trucks -1.94% M/M (-1.99% Last) New Cars/Trucks 0.23% M/M (0.58% Last)
- AIRFARES MAKES NO SENSE. Who is seeing lower airfares? I’m trying to book RT to San Antonio from Newark and it’s $600. New Cars continues to rise. The Used Cars increase that some people were looking at from Mannheim (I wasn’t!) didn’t materialize and we STILL got a high core.
- Here is my early and automated guess at Median CPI for this month: 0.481%
- This is not coming down very fast, but it’s coming down on a y/y basis. I have the median category as Recreation, so this is probably a decent guess at median.
- Add’l observation on rents: Piped Gas was +6.7% m/m (SA) this mo. Utilities are subtracted from some rents to get the pure rent number, when utilities are included in the rent. Mechanically this means that a high utilities number will tend to shave a little off of Primary Rents.
- Piece 1: Food & Energy: 9.63% y/y
- Food and energy actually slightly higher y/y this month. Food & Beverages at +0.50% for the month, still running about 10% y/y. That hurts.
- Piece 2: Core Commodities: 1.44% y/y
- Piece 3: Core Services less Rent of Shelter: 6.03% y/y
- Core Services less Rent of Shelter – this is the big one where the wage feedback loop happens. It’s not decelerating very quickly. At least it’s going in the right direction but since wages aren’t decelerating, there’s really not much good news here.
- Piece 4: Rent of Shelter: 7.96% y/y
- The deflation in Medical Care is basically all due to the continuing drag from Health Insurance. Pharma was +1.2% m/m, matching the highest m/m since 2016. Y/y that’s still just 3.15%. Doctors’ Services was flat, Hospital Services +0.7% NSA. Med Equipment negative but small cat.
- Some good news is that core ex-shelter is down to 3.9% y/y. But with the huge divergence between core GOODS and core SERVICES ex-rents, I’m not sure that number means as much as it once did. Still, the lowest it has been since April 2021.
- I ran this chart earlier. Assuming the same seasonal change in median home prices this month as last January, the rise in rents pushes this down to 1.43. Almost back to trend. Home prices are NOT as extended as people think.
- Kinda funny watching stocks. They really don’t know what to think. Hey, stocks! This is a bad number. Higher than expected, even with Used Cars still a drag. Airfares a drag. Health Insurance a continued drag. I am looking at the breadth stuff now.
- In fact, outside of Used Cars, the only other non-energy category with a <-10% annualized monthly change was Public Transportation. On the >10% side we have:
- Infants/Toddlers’ Apparel (55% annualized m/m), Misc Personal Goods (+44%), Car/Truck Rental (+43%), Mens/Boys Apparel (+18%), Motor Vehicle Insurance (+18%), Vehicle Maint & Repair (+17%), Jewelry/Watchs (+16%), Lodging Away from Home (+15%), Motor Vehicle Fees (+15%), >>>
- Medical Care Commodities (+14%), and Water and sewer and trash collection services (+11%).
- So, this is NOT the picture of a disinflationary price distribution. It’s actually a little quirky because the Median CPI is lower than the median category arranged by the y/y changes. (Median CPI is chained monthlies).
- I mean…this is improving? But not crashing.
- Last “distribution” chart. Our EIIDI is weighted a little differently, and it’s still declining but this month it was only a BARE decline. It tends to lead median, so I remain confident Median CPI is going to drop significantly this year…but it isn’t going to 2-3%.
- Last chart and then I’ll wrap up. This is just showing that the CPI for Used Cars and Trucks was just about where it should be this month. The Mannheim though may just be leading by more. As I said in the walk-up, there’s no reason to expect used car prices to drop much more.
- OK, here’s the bottom line today: higher number than expected and for all the wrong reasons. The things which were supposed to push the number higher didn’t, but we got there anyway. The sticky categories didn’t look good, and they have higher weights.
- We will have to wait another month for good news. The Fed is still going to tighten to 5% before they stop, and this isn’t a good enough reason to keep going…but it’s a good enough reason to talk tougher this month. And they already were talking kinda tough.
- In 5 minutes, let’s say 9:35ET, I’ll have the conference call. <<REDACTED>> Access Code <<REDACTED>> and we’ll sum it all up.
- BTW here is another reason to not worry too much about rents plunging. These are quarterly series that tracked very well until the pandemic/eviction moratorium. Red line is sourced Reis; blue is census bureau. ASKING rents are coming down. EFFECTIVE still rising.
Here’s the simple summary for today’s number: the data was close to expectations, although a bit on the high side. But you have to remember that some of the reasons people were forecasting that high of a number in the first place included “Manheim used car survey suggests an increase” (Used Cars actually were -1.9% m/m), “Medicare re-pricing should push medical care higher for the consumer sector too” (Medical Care CPI actually was -0.4% m/m), and “Airfares are going up, not down” (Airfares actually were -2.2% m/m).
Okay, that last one was mainly me because I still don’t understand how airfares are dropping steadily when I can’t find a single fare within 50% of the normal price I pay for the regular routes I price. But the point is that we did not get a boost from the expected places, but still exceeded expectations; ergo, the boost came from unexpected places. It was broader. Forecasters were looking for a broader slowdown with some one-off increases keeping the m/m number high; in fact they got broad strength with one-off decreases holding it back. This is not good news.
Now, if I am on the FOMC I still want to pause at 5% and take a look around – this isn’t so surprising, unless you really were looking for inflation to hit 2.2% in June (the inflation swaps market’s last trade for June y/y is still at 2.54%, which remains mind-boggling to me). But I keep saying it and everyone will gradually come around to this view: inflation is not getting to 2% in 2023. It’s not getting to 3%. We should count ourselves fortunate if median inflation gets to 4%. The disinflation will be a multi-year project, and the tough part frankly doesn’t even happen until we get to 4%.
Right now, you’ve squeezed most of the juice out of the Core Goods category. You need to see Core Services at least stop accelerating. Deceleration of Core Services inflation, especially rents, are a sine qua non for the Fed getting to its target. We aren’t on the bombing run to the target yet. We’re still at 40,000 feet and slowly descending.
**Late breaking news, after I’d written this whole thing. The Cleveland Fed’s calculation of Median CPI was a LOT higher than mine. The m/m figure was 0.654% and the y/y rose to a new high of 7.08% y/y. I am not sure how I missed by that much and will need to do some diagnosis (it’s not that hard a number to calculate, except for the regional OER numbers), but the bottom line is that we evidently have not yet reached the median CPI peak!
Summary of My Post-CPI Tweets (December 2022)
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. 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!
- It’s #CPI Day – and this one finishes up the book for 2022.
- I am doing the walk-up differently today. I’m doing it as a thread on the night before, which I’ll re-tweet in the morning. I’m usually doing the analysis in the evening…why wait?
- Today’s number, or I guess really we can say starting with October or November, starts the interesting part of the inflation cycle.
- When inflation was going up, excuses abounded but the real debate was WHEN the peak was going to be, and HOW HIGH only to a lesser extent. Now that inflation appears to be clearly decelerating, the much more important debate is: where is it decelerating to?
- If inflation drops back to 2%, and becomes inert at that level again, then the Fed will deserve considerable laurels. If inflation instead drops to 4% and appears resistant to a drop below that, then a much more interesting debate will ensue.
- I think it should be clear that I am in the latter camp.
- The other interesting thing that we’re going to see, and are already seeing, is manifestation of the basic tricks of the trade of macro economists.
- Trick 1 is to assume that everything returns to the mean. Most things do, eventually, return to the mean – so if you are wrong on the timing, you’ll probably eventually be right. Economists love to forecast returns to the mean.
- Economists though are very bad at forecasting departures AWAY from the mean, which is why there were so many forecasts of “transitory” this cycle.
- Since they didn’t see it coming, it must have been a random perturbation (because that’s how their models work). But it’ll all go back to the mean and all is right with the world. Or so goes the assumption.
- Trick 2 is to assume that the mean doesn’t change, or changes pretty slowly. In econometrics terms, the distribution is ‘stationary.’ If you’re going to forecasts returns to the mean, it is fairly important that the ‘mean’ is known or knowable and doesn’t move a lot.
- The problem in inflation is that the (unobservable) mean of the distribution never appeared to be very stable until the mid-1990s; the hypothesis is that this anchoring happened because of “anchored inflation expectations.”
- (A member of the Fed’s own research staff tore apart that notion in a devastating article a couple of years ago, but the Fed promptly ignored him because if he was right it’s really bad for forecasting the way that they like to forecast: everything returns to the mean.)
- Getting to Thursday’s CPI figure, we can see these tricks in play in the economist forecasts.
- As an example, one of the forecasts I saw from a large bank had drags calculated from Used Cars (and New Cars), a deceleration in shelter costs, a drag from airfares due to lower jet fuel costs, and a drag from health insurance. But what about accelerations?
- Do you really think that NOTHING will accelerate, or are all of those pre-defined as “one-offs”?
- It reminds me a little of what Rob Arnott says about the S&P earnings “ex-items”: any one company it might make sense to ex- the unusual events. But in aggregate, some level of unusual events is usual. So it is with inflation.
- There will be some ups. So my forecasts are a little higher than others’, because I anticipate there will be some surprises.
- Where would those surprises come from? Wage growth is strong, and that pushes up on prices in hospitality, domestic manufacturing, food away from home, and even shelter.
- I also don’t think that airfares will be the drag that’s implied by jet fuel. Here’s the regression that would make you think they WOULD.
- But here’s the one that makes you think maybe not. Airlines tend to push prices higher when there are spikes in jet fuel costs, but they don’t necessarily lower them very fast when jet fuel prices decline. And did I mention wage pressures? Airlines feel them.
- I do think that used car prices will drag again, although the CPI has been falling a little faster than the Black Book and Mannheim indices would suggest they should. But I don’t see a strong argument for New Car prices to decline.
- New Cars are in black in this chart, while Used are in blue. New car prices are up 20%, while used are up 40%, since the end of 2019. And the money supply is up around 40%. That doesn’t mean new car prices won’t decline, but it doesn’t look like a slam dunk to me.
- Finally, a point I’ve been making recently on a longer-term horizon viewpoint. Markets are fully priced for inflation to totally and almost immediately mean-revert. Large declines in breakevens, especially short BEI. Some of that is the gasoline slide. Not all of it.
- The short end of the inflation swap curve has NSA inflation at -0.38% m/m in December, +0.37% in Jan, +0.33% in Feb, and 0.30% in March. And that’s the last 0.3% print we see. According to inflation swaps, y/y inflation will be at 2% in June.
- Even if I am wrong about inflation staying around 4-5%, you have a 2% cushion to bet that way. (I think I used an unfortunate analogy a few days ago saying that if you give me 21 points I’ll take TCU over Georgia, but you get my point.)
- Ergo, for choice I’d be long breakevens going into this number.
- The response in the stock market will be interesting. If the number is as-expected or better, I would think stocks will try and scream higher on the theory that the Fed can back off. The problem is that folks are already long for that, I sense.
- So I’d probably sell that pop, especially because earnings may be a hurdle in the near future, though you have to be cognizant of the 200-day moving average in the S&P. The mo-mo crowd will try to get some prints above that so I’d be cautious.
- What about on a strong CPI? Few seem to be thinking/talking of that, which means to me that folks are a little naked there. Do I think it would change the Fed trajectory? Not from what the Fed is SAYING they’re doing, but from what the market is pricing – yes.
- As I said, this is the interesting part of the inflation cycle. Buckle up.
- At 8:30ET, I’ll be pulling the data in & will post charts and #s – then retweet some of those charts w/ comments plus other charts. Around 9:30ish, I will have a private conference call for subscribers where I’ll quickly summarize the numbers.
- Pre-release, both stocks and bonds are loving this number! May be that some are reading into the fact Biden has a speech this morn including inflation as a topic, and perhaps he wouldn’t if the number was bad. But even if it is, he can focus on y/y so not sure that means much…
- That’s all for now. Good luck!
- m/m CPI: -0.0794% m/m Core CPI: 0.303%
- Last 12 core CPI figures
- Overall, highest core number in 3 months, but clearly in a down trend. I think lots of people would be DELIGHTED with 3.6% annualized compared with where we have been, but that’s closer to what I am expecting than what the market/Fed is looking for.
- M/M, Y/Y, and prior Y/Y for 8 major subgroups
- Interesting thing is apparel, up for the second month in a row. Apparel is an almost pure import, so if it’s up then either (a) the recent dollar weakness is already affecting prices or more likely (b) there is pricing power at retail, and the markdowns for Christmas were lower.
- Core Goods: 2.15% y/y Core Services: 7.05% y/y
- The story continues to be bifurcated and we will look further at the four-pieces. More important than the fact that services are trending and goods are deflating, is whether the services part was all rents.
- Here is my early and automated guess at Median CPI for this month: 0.378%
- Clearly good news! Lowest median m/m in quite some time. So core was higher, but median lower. THIS is positive. And as I said, this is the interesting part now: inflation is decelerating, but why and how fast and how far? Median clearly shows it is.
- Primary Rents: 8.35% y/y OER: 7.53% y/y
- Further: Primary Rents 0.79% M/M, 8.35% Y/Y (7.91% last) OER 0.78% M/M, 7.53% Y/Y (7.13% last) Lodging Away From Home 1.5% M/M, 3.2% Y/Y (3.2% last)
- Although the rent data is clearly bad news, there has been a strong campaign against this data to weaken its importance by claiming it’s just really lagged. That’s partly true but the recent research on the subject has enormous error bars for short-term forecasts so…
- Some ‘COVID’ Categories: Airfares -3.12% M/M (-3.02% Last) *** Lodging Away from Home 1.47% M/M (-0.71% Last) *** Used Cars/Trucks -2.55% M/M (-2.95% Last) *** New Cars/Trucks -0.06% M/M (0.04% Last)
- So, I was ‘on’ core even though I was wrong on airfares (it was weak, despite the fact that every fare I saw in December was about 2x normal). Used cars was the predicted drag, and New cars was not…but I was low on rents. That’s the ‘away from mean surprise’.
- Incidentally, Lodging Away from Home was quite strong – and is one of those core-services-ex-rents that is driven a lot by wages.
- Piece 1: Food & Energy: 9.31% y/y
- Piece 2: Core Commodities: 2.15% y/y
- Piece 3: Core Services less Rent of Shelter: 6.34% y/y
- …and here is the spoiler: it wasn’t all rents. Core services less rents still strong. I’ll drill down further in a bit.
- Piece 4: Rent of Shelter: 7.59% y/y
- So, the swap market gets closest-to-the-pin on headline (SA). -0.079% was the figure, a bit lower than consensus econs and a fair bit lower than me. On Core, econs and I were both pretty close as it was right around 0.3% (0.303%).
- I had managed to talk myself into the idea that food and energy would be a bit less of a drag than my model said, but food wasn’t up as much as it has recently been. Ergo, right on core and off on headline.
- Interesting story in Medical Care, which has been a drag recently because of the huge adjustment to insurance company margins (huge and unlikely, btw). Doctors’ Services is slowly reaccelerating a little. Hospital Services continues to have problems getting sufficient sample.
- Overall, Medical Care was up 0.1% m/m, but that’s after the continuing ‘insurance’ drag. Y/Y it was at 3.96%, down from 4.15% but looking like it’s leveling out.
- The median category in the Median CPI will be Food Away from Home, +4.63% annualized monthly number. And the y/y Median will decline very slightly again. Was 7.00% in Oct, 6.98% in Nov, 6.93% in Dec. But heading down.
- Biggest upward m/m movements in core categories were in Jewelry/Watches (+48% annualized monthly), Mens/Boys Apparel (+22%), Lodging Away from Home (+20%), Motor Vehicle Maint/Repair (+13%), and South Urban OER.
- • Biggest decliners were energy things, including Public Transportation, plus Used Cars (-27% annualized monthly figure), and Car/Truck Rental (-18%).
- Core ex-shelter: this includes core goods decelerating rapidly and core services accelerating so perhaps isn’t as useful as sometimes: 4.48% y/y, down from 5.2% last month and the lowest since April 2021. But if it stayed there, then it’s hard to get core to 2%.
- While I’m waiting for the diffusion stuff to calculate, a word on what this does to the Fed: nothing. The Fed is aiming for 5% and then will keep rates high for a while unless something breaks.
- Do markets love this data today because it means they were worried about a more-hawkish Fed, with higher rates or higher-for-longer? Or do they think it means the Fed will in fact start easing this year as the curves impound?
- In my view, the latter is really unlikely. I can see the Fed starting QE again if auctions start getting difficult, but in my view there’s no evidence here that we’re going right back to 2% inflation and the Fed has been loudly consistent about this.
- To be sure, they can turn on a dime and they have previously, but…I just think market pricing is really optimistic.
- This [chart below] is consistent with the good news from Median – for the first time, our diffusion index has declined smartly. It’s still above the highs of the last couple of inflation ‘spikes’ (which no longer look like spikes!), but moderating.
- This chart is not quite as good. The mean CPI is falling more because some high outliers (cars e.g.) are coming back to the pack, and some are moving from low to the low tail, and less because the middle is shifting a lot. Look at how >5% is barely declining.
- I mean, that’s not TERRIBLE news, but obviously we need to see the “<2%” get close to 50% if the Fed is going to be confident they’re back near their inflation target. • One more point and then I’ll prep for the call. A lot of the positive-news things are well along towards delivering what they’re going to deliver. Health ins won’t be a drag in 2024. Used cars won’t drop another 20%. And >>
- >>the dollar has turned south so core goods won’t be in retreat forever. The case for inflation going back to 2% rests on rents turning, and on wages slackening. And while those are expected, there are scant signs of them yet. So hold off on the celebrations in the Eccles bldg.
- OK, let’s wrap up and get to the call. Thanks for subscribing. at 9:35ET I’ll be on this call; join if you want to hear me say what I just tweeted. 🙂 [NUMBER REDACTED]
The CPI figure was broadly in line with expectations, which means it was a “something for everybody” kind of number. Disinflationists see continued broad progress towards the Fed’s 2% PCE target, while sticky-inflation folks see the rents and core-services numbers and shake their heads, tsking ominously.
Two broad observations:
First, the disinflation from core goods is ‘on schedule,’ with Used Cars and other core goods categories doing approximately what they are expected to do. But the problem is that core goods inflation is down to 2.1%. If you are looking for the whole number to go back to what it was pre-COVID, you need core goods in mild deflation and core services down to 3%. But both parts of that story are difficult. With the world de-globalizing and near-shoring, it is going to be difficult to see core goods back in an extended period of mild deflation. Probably 0-1% is the best we can really hope for. And that means that the core goods sponge has been mostly wrung out. And core services back to 3%, even if rents are actually peaking (and just not showing up in CPI yet)? Well, core services-ex-rents remain pretty buoyant. So how do we get that back to 3%?
Second. The interesting part of the story is coming up. Inflation is probably returning to “the mean,” but what is the mean inflation now? For a quarter-century it was stable at 2-2.5%, but prior to that it had never been very stable. There are feedback loops in inflation, and those appear visibly to be at work here: higher wages help support higher services inflation, and rents, which in turn support higher wages. Social Security and other wage agreements that are explicitly linked to inflation help this process along. But it means this: the mean is not stationary. The real question of 2023, and probably 2024, is this: what is the mean, now?
My guess? It’s 4%ish, or even slightly higher. It’s very unlikely to still be 2-2.5%. Ergo, it is going to be very hard for the Fed to end 2023 in a happy mood…which means that it is going to be hard for investors to end 2023 in a happy mood!
Summary of My Post-CPI Tweets (November 2022)
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!
- It’s #CPI Day – the last one of 2022!
- 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 (recently it’s been 9:30ish) 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 .
- Thanks again for subscribing! And now for the walkup.
- Last month, the CPI was significantly weaker than expected. Against expectations for 0.5% core, we got 0.3%. Apparel and Medical Care (specifically in Health Insurance but there was weakness in other parts of Medical Care) were the main culprits.
- However, Used Cars CPI was also more negative than private surveys had led us to believe. A decline in Airfares rounded out the list of usual and unusual suspects.
- But on the other hand…
- Other than Health Insurance, no services were on the “largest decliners” list. While Used Cars was droopy, New Cars inflation remained solidly positive. Rents were lower than in the prior month, but still increased at annualized monthly rates of 8.7% (Primary) and 7.7% (OER).
- Median inflation was still +0.53%, a 6.4% or so annualized rate of increase. The Enduring Inflation Diffusion Index and other measures showed that inflation pressures remained quite broad.
- This month, economists are calling for a repeat of softer core inflation, although the forecasts have been drifting up slightly as more economists add their estimates. Since economists like to shade vs other economists, this is like sharp money coming in on the “over.”
- …although come to think of it, calling economists “sharp money” is probably wayyyy more generous than they (as a group) deserve.
- Those prints (the economists’ estimates) would take y/y to 6.1% on Core (and 7.3% on headline).
- I think the consensus is giving too much signaling weight to the deceleration in goods. It’s real, it’s important…but it is completely divorced from what is happening in services. There, we have a feedback loop in full swing.
- Inflation leads to higher wage demands and settlements, which leads to higher inflation. Or at least, it slows the deceleration of inflation. Next year, we get an 8.7% increase in Social Security payouts, and wages are rising rapidly.
- Median wage growth is basically steady around 6.5%ish. That’s 0.5% below median CPI, when it’s usually ~1% over. Now, I don’t think Median is about to jump another 1.5%, but another interpretation is that wage settlements suggest workers feel like 5.5% is what they’re seeing.
- That doesn’t seem terribly wrong, and I think Median is in the process of peaking, but the point is that people are getting wage increases that in the Fed’s words are “not compatible with 2% inflation.”
- To reiterate something I’ve been saying recently: I think the peak is in, and will show in Median CPI soon, but the real question is whether core goes back to 2%. This is ASSUMED by many economists these days. Peak=”inflation is done.” I think that’s very unlikely.
- We also have to recognize that rents in the CPI are not going to slow soon, and I think economists are getting ahead of themselves on that one as well.
- Yes private rent indices are declining. So? They were also skyrocketing at +18% when the CPI was not (this chart is sourced from https://en.macromicro.me).
- That’s because only a tiny proportion of rents were turning over at those increases The CPI was designed to capture the broad trend of expenses to consumers, NOT to mark-to-market the whole rent market. So CPI goes up less, and down less.
- To be sure, rents are higher than my model “expected” them to be, but it’s not really egregious and I don’t expect them to slow markedly and immediately. **I think some economists are mistaking timely data for quality data.**
- Another effect, more minor, I discussed on the private blog a week or so ago: the possibility that Hospital Services has some catch-up this month after not being reported last month. See the tweet at https://twitter.com/InflGuyPlus/status/1600503515121680384 Worth a couple of bps max.
- So, I’m on the ‘over’ for this report, but I can make a case for a higher-than-0.4% core more easily than I can make a case for a lower-than-0.3% number.
- Now since last month’s surprise, breakevens have dropped and so have real yields. It helps that Powell and others have basically committed to decelerating Fed hikes this month, and the market clearly believes (as do I) that they’re nearly done.
- I don’t think this number will change that trajectory unless it’s, say, 0.7% on core or something like that. Even then, it would be very hard for the Fed to produce 0.75% tomorrow with no time to leak the change…and a quarter point wouldn’t matter much anyway.
- BUT, if we got a crazy number then the market would immediately price a higher peak rate and push the pivot out further in the future. And stocks would get shellacked.
- We’d need a lot of messaging pretty quickly in that case, and liquidity is very thin at this point of the year. Fortunately I don’t think we get anything that outlandish. Knock wood!
- Good luck! Done with the walkup a bit early this month since I started early. Auto charts will follow the print fairly quickly. I still curate the charts rather than totally auto-tweet them; one of these days I’ll trust the Machine but not yet.
- Someone is pretty sure they know the number three minutes early! Equity futures just popped 20 points.
- …looks like he did! Weak figure.
- m/m CPI: 0.0963% m/m Core CPI: 0.199%
- Last 12 core CPI figures
- Just to be clear, core at 0.2% almost exactly was the best in years. Doesn’t really feel like that when you are out shopping, IMO.
- M/M, Y/Y, and prior Y/Y for 8 major subgroups
- Apparel back in positive territory, which is slightly surprising. In Medical Care, Medicinal Drugs were +0.08% m/m, and Doctors’ Services +0.04%. Pretty weak, but not negative. The negative is entirely from Health Insurance and I’ve said my piece there.
- Here is my early and automated guess at Median CPI for this month: 0.477%
- Always a caveat here when the median category is a regional housing index. Still, it would be the lowest in more than a year although 5.7% isn’t exactly great.
- Actually, when I calculate this using my spreadsheets I get 0.456% m/m with Recreation the median category. That would put y/y still at 7%, but slightly (very slightly) lower than last month. Fairly easy comp next month, so high might not quite be in, but pretty close.
- Core Goods: 3.68% y/y Core Services: 6.82% y/y
- story here is that core services reaccelerated a tiny bit. NOT that core goods plummeted. Core goods reverting lower is something we knew already.
- the SIZE of the core goods adjustment is what was surprising. I wonder how much of this involves early Christmas discounting. There was certainly some fear among retailers that they’d over-ordered. I don’t have an easy way to measure that.
- Suffice to say that I’d like this number better, if it was services which had decelerated.
- Primary Rents: 7.91% y/y OER: 7.13% y/y
- Further:
- Primary Rents 0.77% M/M, 7.91% Y/Y (7.52% last)
- OER 0.68% M/M, 7.13% Y/Y (6.89% last)
- Lodging Away From Home -0.7% M/M, 3.2% Y/Y (5.9% last)
- So, rents were HIGHER than last month, 0.77 vs 0.69 on Primary rents and 0.68 vs 0.62 on OER. This is convenient since economists have convinced themselves that they can look past this. Again, the question isn’t whether it decelerates. It’s HOW MUCH, when it does.
- Some ‘COVID’ Categories:
- Airfares -3.02% M/M (-1.1% Last)
- Lodging Away from Home -0.71% M/M (4.85% Last)
- Used Cars/Trucks -2.95% M/M (-2.42% Last)
- New Cars/Trucks 0.04% M/M (0.37% Last)
- Just want to say that Christmas airfares are way above normal, but nationwide fares are about right for the level of jet fuel prices. Weak Lodging Away from Home too. Note that New Cars is still rising, though weakly this month.
- Piece 1: Food & Energy: 11.5% y/y
- The story here continues to be that it isn’t down more than it is. Food is staying buoyant.
- Piece 2: Core Commodities: 3.68% y/y
- Piece 3: Core Services less Rent of Shelter: 6.33% y/y
- It is funny to me that all of a sudden, this is the category everyone is talking about. And…it’s really not showing anything super positive, especially when you consider that health insurance is a drag. This is actually pretty bad news.
- Piece 4: Rent of Shelter: 7.19% y/y
- OK, so let’s hold the phone here.
- Today’s number is a core goods story. Core goods y/y went to 3.7% from 5.1%. But core services went UP to 6.8% from 6.7%. Used cars large decline (& CPI is now ahead of private surveys a fair amount). And that’s despite health insurance, a large fall in airfares and auto rental.
- Overall Core ex-housing (which includes core goods) is down to 5.2% y/y. That’s the lowest since…well, September 2021. Going the right direction but unless core services start to decelerate, there’s a limit to how good this picture can be.
- So here’s the distribution story. Here is the overall distribution. You can’t tell much from this unless you have the prior chart handy. But there was a shift in the middle.
- In red is the weight of components above 6% y/y growth. In blue, the weight of components above 5% y/y growth. This doesn’t tell you much about the monthly figure exactly but it tells you the middle of the distribution is shifting left. Still pretty high though!
- Let’s see. Biggest monthly decliners in core were Used Cars and Trucks (-30% annualized monthly ROC), Car/Truck Rental (-26%), and Public Transport (-22%). Nothing else in the Median set declined faster than 10% at an annualized rate (Health Insurance is one level lower).
- There were actually a lot of big gainers: Misc Personal Goods (+27%), Infants/Toddlers Apparel (+21%), Personal Care Services (+18%), Vehicle Maintenance/Repair (+17%), Communication (+13%), Jewelry/Watches (+11%), Vehicle Insurance (+11%), and the South Regional OER (+11%).
- Lots of decliners in Recreation/Goods: TVs (-3.8% m/m), Other Video Equipment (-4.1%), Audio Equipment (-1%), Sports Equipment (-0.9%), Photographic Equipment/supplies (-1.6%), Toys (-1.8%)…see any common theme there? That looks like XMas.
- Now, those are NSA, so some of that is the natural seasonal discounting of Christmas. But that is usually bigger in December.
- First real pullback in the Enduring Investments Inflation Diffusion Index. So that’s also supportive of the notion that the peak is in.
- Let me sum up. This supports the idea of a Fed taper, but I didn’t think there was much chance of derailing that unless we got a BIG number. But it’s not all it’s cracked up to be. I suspect early seasonal discounting had a lot to do with this.
- Core services ex-rents is the fly in the ointment and will continue to be so until wages start to decelerate. No sign of that yet. I think next month we are unlikely to see another 0.2% on core.
- But that’s not the market story. The market is celebrating because the Fed is nearly done. Now, they are not going to start easing unless there’s a market crack-up and there’s no sign of that happening while people are happy about rates peaking.
- The story is intact, despite the fact I was surprised by the overall figure: inflation is peaking, the Fed is nearly done…but inflation isn’t going back to 2% any time soon. *Nothing in this number suggests it is.* The sticky stuff is all still ugly.
- To me…that’s a story of a steepening curve next year. Short rates aren’t going to go up when the Fed is sidelined but long rates will eventually have to adjust to a higher-inflation reality (and increasing deficits along with a balance sheet taper).
- I’m going to give this summary verbally if anyone wants to listen! Call the conference number at <<REDACTED>> Access Code <<REDACTED>>. We will start at 9:40ET (9 minutes).
This CPI print was definitely a surprise, but let’s just tap the breaks a touch. It was a one-tenth surprise on core CPI – certainly welcome, but it hardly changes the overall narrative. Let’s review the points of the overall narrative:
- Inflation is in the process of peaking, or has already peaked.
- Goods price inflation is decelerating markedly, for both demand- and supply-side reasons.
- Rents will eventually decelerate, of course, but private surveys seriously overestimate the degree of the deceleration and the timing.
- Core services ex-rents, where wage inflation lives, is going to prove sticky.
- All of this means that after the peak, median and core inflation will drop…but not to 2%. More like 4%-5%, where they will be disagreeably stubborn about declining further.
In today’s number, nothing in that list really changed. The deceleration in goods price inflation was sharper than I expected, but a lot of that was used cars and a lot of it were in categories that smell a lot like early Christmas discounting. Notably, rents reaccelerated from last month and core services ex-rents showed no signs of weakness.
What does this mean for the Fed? 50bps tomorrow, probably 25bps at the next meeting and possibly one more 25bps hike after that. And then the Committee stays on hold for most of the rest of 2023, unless something breaks. The bond market is pricing the former, but not the latter. The Fed is very unlikely to overreact to an 0.1% miss in core CPI, especially when their expectation is that inflation is decelerating.
So nothing really changes about the story on the basis of today’s number. I will add a few final thoughts, though. (a) part of the miss today came from Used Cars being down more than it “should” have given private surveys. That’s likely going to be a give-back in the future. (b) if part of the miss was due to early Christmas discounting, then that will come back in December or January. (c) someone really needs to look into the huge trades right before the number was released. This wasn’t an accidental post on the website. And you don’t put that much money into an illiquid market on a guess. Someone knew something. Do I expect anyone to investigate? Not really.
Summary of My Post-CPI Tweets (October 2022)
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! Note that this month and going forward, I will be delaying the drop of this tweet summary and the podcast until the afternoon rather than dropping it late morning. So subscribe if you want it live!
- 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.
- Thanks again for subscribing! And now for the walkup.
- The chance of more-lasting inflation just went up a lot. With the much-narrower-than-expected margins for the Republicans in the House – and perhaps no margin at all in the Senate – this is “divided government” IN NAME ONLY.
- Republicans are notoriously bad at whipping their vote, and with a narrow margin it will be very easy to pick off a couple of votes with well-chosen pork to pass large stimulus measures if the Democrats want it. And they probably want it.
- And why shouldn’t they want it? The Republican message in the midterms was “Biden caused this inflation and we voted against the Inflation Redution Act.” The Democrat message was “Putin caused this inflation and we PASSED the Inflation Reduction Act.” Evidently, that resonated.
- Politicians will keep pushing MMT as long as the populace allows them to get away with it. And with such a narrow majority, Republicans can probably not ‘hold the line.’ Ergo, there will be more stimulus ahead.
- To say nothing of other continuing pressures, on resources & a need to shorten supply chains as the world fractures the post-Berlin-wall detente. To say nothing of demographic challenges. To say nothing of the fact that prices still have far to go to catch aggregate M2 growth.
- Those are not stories for the October CPI, but they are the backdrop.
- I was at a conference the last 2 days and several mainstream economists stated (it was barely phrased as an opinion) that core inflation will definitely be around 3% by middle of next year and low 2s by end of 2023.
- This seems ignorant of the composition of the CPI. EVEN IF you think inflation pressures in a macro sense are ebbing, we haven’t yet seen any signs of that in the data. Y/Y median CPI has accelerated 14 months in a row. Rents remain buoyant.
- Rents will eventually slow, but it will be a while before they slow very much. So far they are still accelerating! And core-services ex-rents is my recent focus. As a reminder, that’s where you find the wage-price feedback loops. And it has recently started spiking higher.
- But there is a potential fly in the ointment in that group this month, and that’s the question about the CPI for health insurance. Here is the issue that some people are worried about.
- Medical care is paid for by consumers directly, and indirectly for consumers by insurance companies. It is straightforward (if complex) to measure the part of medical care paid directly to providers – just ask doctors and hospitals.
- The problem is that there is a difference between what insurance companies receive from consumers (which is part of consumers’ cost) and what they pay to doctors. That is, profit.
- That’s still a cost to consumers but not captured if you just ask doctors. It shows up in the “Health Insurance” part of Medical Care CPI. So, periodically (because it’s not at all straightforward) the BLS tries to figure out this difference and adjust for it.
- It tends to happen roughly this time of year, which is why people were looking for it last month and still looking for it this month. Here’s the problem – it isn’t always important.
- You can see in the m/m changes in Health Insurance that sometimes there’s a discontinuity in the monthly figures, and sometimes not. Here’s the salient point, though – the adjustment doesn’t really matter.
- If it’s done right, then the overall inflation in Medical Care will be about right. Could be seasonal issues, so any given month it could be wacky, but the REAL question is: is inflation in Medical Care overall accelerating/decelerating? Sure looks to me like it’s accelerating.
- So I don’t pay a lot of attention to this nuance but be aware that it COULD have an impact potentially today.
- Last month, big drivers were Rents again (primary=0.74%, OER=0.71%), Medical Care (0.68%, with Hospital Services 0.78% m/m and y/y Prescription Drugs at 3.2%, highest since 2018). Oh, and “Other” at +0.73%.
- Inflation is of course very broad, and that means it is going to keep being pretty resilient. Until one day it starts narrowing and being less resilient. There’s no good way to say when rents will roll over. They will eventually. Probably not today.
- But breakeven market is being very optimistic generally about this eventual occurrence! There’s almost no penalty to betting inflation will NOT go back to its old level. Or at least, a pretty small one.
- Used cars this month will again be heavy, but probably not as heavy as last month’s -1.1%. Used car prices have retreated (in the Black Book survey) about 12% from the highs but remain up about 35% since end of 2020. That’s about the same as M2, so it’s roughly “right”.
- Of course not everything will be up the same amount as the general price level, but that’s a decent touchstone. On average, once velocity finishes correcting back, the aggregate price level should be +30%-+35% (based on current M2) from 2020. Currently +15%. Long way to go.
- Markets since last month: breakevens are up a bit, but real yields close to unchanged. Reals are pretty close to a long-term fair level. They’ll go higher if nominals go higher but they’re a pretty decent deal esp relative to nominals given the long term breakevens.
- …and the nominal auction yesterday was pretty ugly, so I don’t know that the fixed-income bears are done. I suspect the Fed is getting close, though. My guess for terminal rate is currently 5%.
- Econ consensus for today’s CPI is 0.62% m/m on the headline and 0.47% m/m on core, bringing y/y core to 6.52%. With the medical insurance issue I’m reluctant to hazard a guess but 0.47% seems optimistic. Avg for last 6 months has been 0.56%. But interbank is LOWER than 0.47%.
- In any event, good luck! Auto charts will follow the print fairly quickly. I don’t know how many months I will be doing this before I stop being nervous about the automation. But I throttle those charts still to make sure that if something looks wrong it isn’t followed by 9 more.
- m/m CPI: 0.438% m/m Core CPI: 0.272%
- OK now let’s look at these. Obviously the core figure was a disappointment but I can already see it’s not something I’m terribly worried about and not likely to signal that we’re done. That said, it should be a nice rally number.
- Last 12 core CPI figures
- Primary Rents: 7.52% y/y OER: 6.89% y/y
- Further: Primary Rents 0.69% M/M, 7.52% Y/Y (7.21% last) OER 0.62% M/M, 6.89% Y/Y (6.68% last) Lodging Away From Home 4.9% M/M, 5.9% Y/Y (2.9% last)
- Well, 0.69% m/m is better than last month’s 0.84% on primary rents, but not exactly the deflation that people are expecting to happen ‘soon.’ Soon, it seems, is still a bit far away.
- M/M, Y/Y, and prior Y/Y for 8 major subgroups
- Immediate observation – huge decline in Apparel (yes, a small weight) and in Medical Care (which I suspect is the technical adjustment). Housing, Food, Other, Recreation, all high.
- Here is my early and automated guess at Median CPI for this month: 0.613%
- Median: definitely better than recently! but a 7.6% compounded annual median rate isn’t GOOD news. And it suggests that most of the miss was in a few categories, not the main body of the distribution.
- By the way, a little asterisk on my median calculation – I have the median category as West Urban OER. Since the individual components of OER are seasonally-adjusted (but we don’t know the seasonals), my estimate will be slightly off.
- Core Goods: 5.08% y/y Core Services: 6.74% y/y
- And you can see the effect of Apparel (and Used Cars, which was down more than I expected it would be and more than Black Book suggested it would be) on core goods. This is partly a delayed dollar effect, and some supply-side relaxation, and not surprising in a macro sense.
- Some ‘COVID’ Categories: Airfares -1.1% M/M (0.84% Last) Lodging Away from Home 4.85% M/M (-1.04% Last) Used Cars/Trucks -2.42% M/M (-1.07% Last) New Cars/Trucks 0.37% M/M (0.67% Last)
- So Used Car prices are coming down, and New Cars still going up. Remember in mid-2021 Used Car prices in some cases exceeded New Car prices b/c New weren’t available. They are now, so this is the convergence. Used is correcting, New is trending.
- Used cars on top, New Cars on bottom, since day 1 of COVID. New have another 10% to go higher, Used another 15% lower, is my guess.
- Piece 1: Food & Energy: 13.3% y/y
- Piece 2: Core Commodities: 5.08% y/y
- Piece 3: Core Services less Rent of Shelter: 6.42% y/y
- The y/y for health insurance went from 28.1% to 20.6%. Obviously, those numbers are way too high. But it caused the y/y for Medical Care to drop from 6% y/y to 5% y/y. This seems exaggerated.
- Now, to be sure Medicare is dropping the amount that it is reimbursing health care providers. But Medicare is not in CPI and a squeeze on Medicare reimbursements may make the consumer part of health care more resilient. Got to pay health care providers somehow.
- Piece 4: Rent of Shelter: 6.99% y/y
- No sign of any slowdown in rents yet. And without that, we’re not getting 2% inflation next year, period.
- That really was an amazing adjustment to health insurance. I applaud those who decided it was going to be huge. Again, though, it’s just a question of how Medical Care inflation gets allocated. And it’s a one-off thing.
- Outside of food and energy, the biggest monthly decliners were Infants and Toddler’s Apparel (-32% annualized), Jewelry and Watches (-30%), Used Cars and Trucks (-25%), and Footwear (-13%). No services. OTOH…
- Biggest gainers were Lodging Away from Home (+77% annualized), Misc Personal Goods (+26%), Vehicle Insurance (+23%), and Food Away from Home (+11.8%). That last one is obviously Food & Energy but it’s also a wages indicator.
- Looking at Median some more, probably the lowest it could be (if my West Urban OER seasonal is way off) is 0.55%. And could also be higher than my estimate.
- Core inflation ex-housing fell to 5.9% from 6.7%. That’s the lowest it has been since 11/2021. And it’s a good sign. A lot of that is goods.
- The deceleration in goods inflation is completely real. But that doesn’t mean goods prices are going to go DOWN, which is what consumers are expecting. Some places where there were overshoots like in Used Cars will go down, but in most cases we’re talking small.
- Here’s the challenge on the Fed question. I wouldn’t take a victory lap even though this is the lowest core m/m in more than a year. Median has still not obviously peaked! Next core comps are 0.52%, 0.56%, 0.58%, 0.50% before 0.32% in March.
- That means we are probably looking at core which will be steady to declining slowly, but not coming down rapidly. There aren’t 0.6s or 0.7s to roll off until May. So it will look like a peak but not a rapid drop. Unless of course rents roll over and drop like a stone.
- OR, suddenly workers start getting wage cuts. Keep in mind that the Social Security adjustment for next year will flush a lot more money into the system. There’s just a lot of bad feedback loops that are in play.
- By the way, Lodging Away from Home was high (+4.9% m/m) this month. That’s a volatile category but surprised me. Hospitality is having difficulty with finding workers though and so this is another one of those pass-throughs I suspect.
- Here’s the distribution of lower-level price changes y/y. It’s an interesting tale. The lower tail are mostly goods (insurance won’t be there for a long while), upper tail has some foods and some services. The middle part is still 7-9%.
- Having said that, this is starting to look more like a disinflationary distribution where the mean is below the median because long tails start showing up to the lower side. I think we’ve likely seen the peak, although Median will take a bit yet.
- I mean we still have 65% of the distribution above 6%…
- That health care insurance adjustment is odd. Normally the BLS smears the adjustment over 12 months roughly equally. I can’t imagine this is going to be 4% PER MONTH for a year. That would be really weird. Something to dive deeper on. For now I’m treating it as one-off.
- Last chart. I didn’t run this last month because of tech issues. The EI Inflation Diffusion Index remains high but dropped to 41. It’s not yet really signaling a peak in pressures but if we get down to 30 or 35 I’ll feel better that the peak is real.
- OK, let’s try the conference call for anyone who wants to hear this verbally. 🙂 [REDACTED] Access Code [REDACTED] Let’s say 9:35, 5 minutes from now.
The number today made a lot of folks very happy, but it is a trifle early to declare victory over inflation yet. Core goods remains in deceleration mode. This is no surprise; the extended strength of the dollar helps depress core goods prices with a lag. The sharp drop in apparel prices is sort of the poster child for this effect. But the dollar will not be strong forever, and when it goes back to something like fair value – when the Fed stops hiking aggressively relative to the rest of the world – then there will be a little payback in this category. That doesn’t mean 10% core goods inflation but neither does it mean that we’re going back to the old normal of -1% inflation in core goods year after year. Given the re-onshoring trend and the general unsettled nature of geopolitics, I suspect core goods will end up oscillating around low-positive numbers. Think 1-2%, not -1% to -2%.
Rents remain strong, and there is no sign that they’ve rolled over yet. They will eventually, but it takes a long time for rents to reflect changes in home prices and even longer for asking rents to be fully reflected in rent CPI and OER. Rents will decelerate from here, but not for a while. And they’re also not going back to 2%.
Core services ex-rents is in a continued uptrend. There was a small correction this month, but the feedback loop has been triggered. Next year’s Social Security adjustment will throw more fuel on the fire, and even if unemployment rises so that real median wages decelerate nominal wages are going to keep climbing faster than they have historically. Core services ex-rents…and we saw similar effects in Lodging Away from Home and Food Away from Home, both of which have a big wage component…is going to stay strong for a while.
By the way, on Medical Insurance…that 4% per month drag over the next year is going to add up to 0.3% on headline and a bit more than that on core. But only if this isn’t offset elsewhere in the medical care category. This is bean-counting: insurance in the CPI doesn’t really measure the cost of insurance premiums but insurance company profits. If our estimate of profits declines it’s either because people are paying less for insurance (not likely) or because insurance companies are paying more out to doctors, which means the inflation should just show up there instead. So it will be a consistent drag that is mostly irrelevant in a practical sense.
All of which is to say that while core CPI has likely peaked, and median inflation will probably peak in a few months, the folks who are looking for it to drop to 2% next year are going to be terribly disappointed. I’m sticking with my view that we will be at high-4%, low-5% for 2023.
The Fed, though, will take the peak in Core as a reason to step down to 50bps at the next meeting, then probably 25bps, and ending at around 5%. If rates are at 5% and median inflation is around the same level late next year, it isn’t clear that much higher rates would be called for especially in a recession. But neither will much lower rates. So I think overnight rates get to 5% and then stay stuck there for a while. If you found this useful, and would like to get it in real time during next month’s CPI report, go to https://inflationguy.blog/shop/ and subscribe to my private Twitter feed. You can also subscribe to my quarterly, or purchase a single issue of the Quarterly Inflation Outlook (either current or historical). Thanks a lot for your support.
Summary of My Post-CPI Tweets (September 2022)
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 (August 2022)
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! Get the Inflation Guy app in your app store! 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.
- Back to CPI Day – my favorite day of the month. Yours too? I’m glad.
- A reminder to subscribers of the path we take today: First the walkup; then 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.
- I will put replies to those charts as necessary. Then I’ll run some other charts. What I will NOT be doing this month is the live commentary. Last month, that actually slowed everything down because of the multitasking.
- So instead, afterwards (hopefully 9 or 9:10ish) I will have a private conference call for subscribers where I’ll quickly summarize the numbers. Not sure if that’s valuable, but we’ll try it.
- After my comments on the number, I will post a partial summary at https://inflationguy.blog and later will podcast a summary at http://inflationguy.podbean.com . And all of that also will be linked on the Inflation Guy mobile app.
- Thanks again for subscribing! And now for the walkup.
- There was a talking head this morning saying “we should only care about the sequential number, not the y/y number. Those usually say the same things but not recently. And the sequential number is fresher” (I’m paraphrasing).
- Couple of things wrong with this statement but I will focus on the main one: there is no planet on which one economic data point should matter overmuch to your view.
- Can one number refute your null hypothesis? These are experiment results, samples from a distribution we can’t know. One data point would have to be wildly different than your null, and if it was then you’d suspect there is some quirk in the data.
- For example, that’s what happened last month: median CPI printed again a little above 0.5%, but there was a very low headline number (because of gasoline) and a very low core because of large movements in small categories.
- Large moves in small categories aren’t likely to be repeated, and they don’t tell you a lot about the overall distribution. They are more likely to be mean-reverting than trending. They shouldn’t change your view much, especially since Median is still rising at >6% pace.
- The other issue with what he said is: the real question isn’t whether inflation is accelerating or decelerating. It is decelerating, and so the y/y number will decline. Most of the deceleration is in core goods. That has been expected for some time. Partly ports, partly dollar.
- The real question is: will we recede on core/median to 2.5%, or 5%? I think it’s closer to the latter than the former, and not until next year, but there is no way that ONE NUMBER could really answer that.
- So I care about sticky, I care about whether we are seeing a new uptrend in core services, I care about rents. I don’t care so much about lodging away from home.
- Now, that doesn’t mean we should ignore this number. Indeed, to me it seems that expectations for this number have swung really to the low side. Both in economist land and in trading land.
- Here is a chart of changes over the last month. Large declines in breaks at the short end – although to be fair a decent part of that is carry. But the optics influence the forecasts of those who don’t really dig into the guts, and that might be an opportunity.
- Forecasts to me look low. Consensus is -0.1% on headline, +0.3% on core. The y/y forecast for core is 6.1% (which tells us that the real forecast is 0.32%-0.34%. Any higher and m/m rounds to 0.4%. Any lower and the y/y rounds down to 6.0%.)
- That seems low. Last month’s 0.31% on core was infected by a lot of one-offs. Airfares -7.8%, Lodging away from home -2.7%, car/truck rental, etc. But primary rents were 0.7% m/m, and OER 0.63% m/m. So how do we get another 0.32% on core?
- Well, you COULD get a retracement of some of the rents rise last month. That’s really the only thing I’d worry about. Some of the drops from last month may retrace (although core goods deceleration is real). But 0.3% seems sporty, especially with median still where it is.
- The core/headline spread looks to me like it should be about -0.36%, so if we get 0.4% on core then we could print a small positive on headline. I think that’s where the risk is, unless rents are way off.
- Used cars will drag a bit again this month, but it won’t be large.
- I should say the interbank market is more in line with me than with economists. 295.71 NSA traded yesterday. That would be an NSA m/m decline, and a small positive SA.
- The real question is the Fed’s reaction function. And I think their reaction to THIS number is basically nil. They’re going to go 75bps at the next meeting because the market has validated that level. The question is NEXT meeting; that will depend on how markets are behaving.
- The Fed BELIEVES they are close to done, which is why Powell can make a vacuous “until the job is done” statement. The job (shrinking the balance sheet) has barely started, but they may be close to done on short rates.
- Because if they’re ahead (and they think they are), at some point they need to pause to see the effect of their actions to date.
- For today, there may be downside equity risk if the number is a little higher as I expect. But if it’s as-expected, there may be UPSIDE risk…probably fadeable, but I think the market reaction function and the Fed reaction function may be diverging.
- So I know what I’m going to do when the number prints what the number prints, but I am less sure of what the market is going to do. Kinda feels there is still downside to equities. With real rates where they are, equities still look expensive (chart uses our equity return model).
- OK, that’s all for the walkup. Number in 10 minutes. Good luck!
- oooops
- M/M, Y/Y, and prior Y/Y for 8 major subgroups
- Food and beverages still rising. 0.77% m/m and 10.9% y/y! All other subindices contributed. “Other” was +0.73% m/m so that will be interesting. Medical Care +0.68% and that is also going to be interesting/disturbing.
- Here is my early and automated guess at Median CPI for this month: 0.738%
- Look at the median chart. This is just an estimate, and depending what the median category is it might not be precisely right…but if it is, then the 0.738% m/m is a new high for the m/m. OUCH.
- Core Goods: 7.06% y/y Core Services: 6.07% y/y
- Core goods actually went UP y/y, just a tiny bit, 7.06%. And core services continuing to rise, 6.07%. Convergence at 6.5% is not what people were hoping for.
- Primary Rents: 6.74% y/y OER: 6.29% y/y
- Further: Primary Rents 0.74% M/M, 6.74% Y/Y (6.31% last) OER 0.71% M/M, 6.29% Y/Y (5.83% last) Lodging Away From Home 0.1% M/M, 4% Y/Y (1% last)
- Primary rents 0.74% m/m. OER 0.71% m/m. That’s the big ouch. I read this morning on Bloomberg I think that ‘rents are near a peak.’ Uh, sure. Lodging Away from Home was positive…didn’t retrace last month’s drop, but didn’t repeat it either.
- I mean, this is a little scary, right? No sign of a peak yet.
- Some ‘COVID’ Categories: Airfares -4.62% M/M (-7.83% Last) Lodging Away from Home 0.08% M/M (-2.74% Last) Used Cars/Trucks -0.1% M/M (-0.41% Last) New Cars/Trucks 0.84% M/M (0.62% Last)
- Airfares keep sliding, but again a lot of this is jet fuel. As has been pointed out elsewhere, if you quality-adjust airfares then inflation is still soaring. Used cars was a small drag, as expected. But look at new cars!
- The rise in new cars is probably the reason that core goods advanced. 0.8% m/m in new cars is impressive.
- Piece 1: Food & Energy: 15.7% y/y
- Only surprise here is that it isn’t retracing nearly as much as people expected. You know why? FOOD. When was the last time we really worried about food prices driving the CPI?
- Piece 2: Core Commodities: 7.06% y/y
- Piece 3: Core Services less Rent of Shelter: 5.75% y/y
- This is even more concerning than the shelter numbers, in my mind. I’ll dig deeper into medical care, but this has been a well-behaved part of CPI for a long time. BUT IT’S WAGES. That’s what matters in this group. This is where your wage/price spiral would show up.
- Piece 4: Rent of Shelter: 6.31% y/y
- So 0.12% on headline (SA), 0.57% on core. Not exactly what the market was expecting.
- Yeah, so I guess last month were one-offs. But those of us “in the know” knew that, right?
- Last 12 core CPI figures
- Stocks are NOT happy with this. And that’s no surprise! But it’s not because the Fed is going to go 100bps this month. They won’t. It’s because suddenly “maybe they’re not as close to done as we thought.” More on my thoughts about the Fed later.
- I need to run some of my slower charts now but looking at markets the only quirky thing – I understand the market but it’s weird – is that energy prices are down. The theory is that more Fed hikes slow the economy more, but if you’re connecting growth and inflation then>>
- …you’d have to also say that growth must be stronger than we think. Energy is confusing nominal and real prices again, too. Maybe it’s a dollar thing. Dollar is definitely stronger as Fed arc is perceived higher now.
- …but it’s a weird idea that the more inflation you get, the more you want to sell commodities, isn’t it?
- Core ex-shelter rose to 6.36% from 6.04%. Back to the level of May. Hard to tell on this chart. This will probably continue to decline, but…this is the really surprising part of the report. Going to get to the smaller stuff in a bit and see what’s up.
- Car and Truck rental was -0.5% m/m (NSA)…it was a big drop last month as well. Interesting and not sure what that means.
- No other interesting declines. On the upside was New cars…at 4% of the basket, that was 3-4bps of the surprise roughly. Not enough to explain it all!
- Lots of other motor vehicle stuff. Maintenance and repair, insurance, parts and equipment…all rose at greater than a 10% annualized pace.
- Also…south urban OER rose 0.9% m/m or so. So rents and prices are rising in the south, but not falling in the north. Some of that is migration. The median category was Rent of Primary Residence, which as noted was large.
- With the median as Primary Rents, my 0.74% m/m median guess is probably pretty solid. That takes y/y median to 6.7% I believe. yowza.
- Medical Care…Prescription Drugs +0.36% m/m (NSA). Dental Services +1.31%. Hospital Services +0.78%. YES. I’ve been wondering where this was for a long time. Still only up to 4% y/y, but it’s way overdue.
- Similarly, prescription drugs…3.2% y/y, highest since 2018. I wonder if the determination that Medicare will ‘negotiate’ more drug prices is leading manufacturers to hike prices in advance?
- OK…college tuition and fees, +1.3% m/m. That’s not unusual for the NSA to jump in this month; tuition jumps once a year basically. But that means the y/y change is going to move higher as the SA adjustment is smoothed in. Now it’s at 2.79% up from 2.35%.
- Colleges have cost pressures too. And wage exposure. Over the last few years tuition inflation has been low because endowments and government support has been huge. This is all fading though, and costs are still climbing. Look out above.
- Finally, in “Other”. We have cosmetics, perfume, bath, nail preparations (yes that’s a category) +2.3% m/m. Financial Services ex-Inflation Guy +0.87% m/m. Haircuts and other personal care services +0.66%. Notice something there? A lot of wages.
- On the plus side, “Funeral expenses” was -0.5% m/m. So we got that going for us. Cigarettes +1.1% m/m.
- While I wait for the diffusion stuff to calculate I’ll start the (brief) summary call. Dial the conference line at <<redacted>>. I’ll start in 3-4 minutes.
- OK last chart. The red line here isn’t really going off the chart (yet) – it’s median at 6.99% (est). The EI Inflation Diffusion Index – no surprise – is not coming off the boil. Inflation remains high, but also broad. Some categories are slowing, but some are accelerating!
Honestly, I came into today thinking that this was a less-important CPI report than we had seen in a while. As I said in the walk-up, I thought the real question is whether this changes the Fed’s decision at the next meeting, not this month’s meeting. As it turns out, the answer to that is probably yes (but we have another CPI before that meeting). But the more important question that has re-surfaced is, “have we really seen the highs in inflation yet?”
That seems crazy to ask, if you believed that this was all one-offs caused by clogged ports and “supply constraints.” It hasn’t been about that in a long time – and really, never was, since those clogged ports were caused by artificially-induced demand – but if you’re still in that camp you’re utterly shocked here. But it still seems wild to ask from my perspective. My view has been that if the money supply has risen 42% since the beginning of the COVID crisis, and prices are only up 15%, then prices have a lot more to do before they are in line with money growth. But I thought that would happen more gradually, with a 5%ish inflation that stuck around longer than people expected.
That’s less clear now. 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. We don’t import services; we pay people to provide them. If you want a wage-price spiral, look in core services ex-shelter to see if it’s happening. Honestly? That part of CPI was already looking a little spritely in recent reports. But it looks to have really broken out now. That’s very disturbing. It adds momentum to the CPI.
Ultimately, it’s still all about whether there’s too much money chasing too few goods. But if a wage-price spiral gets started, then that will manifest in higher money velocity over time so that even slower money growth will be associated with rising prices. That’s a bad thing.
By the way, it isn’t anything the Fed can break with interest rates. Decreasing the money supply has never really been the Fed’s focus, but that’s the lever they needed to be moving. And now? Doing that now would have less of an effect, if we have momentum in pricing again.
It’s still the right move, but the FOMC has made a terrible mess of this and is going to wear it.
That being said, there is another CPI due before the next Fed meeting. My thinking had been that the Fed figured they were close to done (otherwise, Powell beating his chest with the manly-but-vacuous ‘until the job is done’ thing…which by the way is going to become a meme just like ‘transitory’…just didn’t make any sense), so that if this number was as-expected they would be considering just how soon to pause their hikes. Maybe as soon as November. Now, that’s sort of out the window.
The market reaction makes eminent sense given this backdrop. But you didn’t need me to tell you that. Before this even printed, the fact that expected real equity returns were basically below long-term TIPS returns meant that being in equities didn’t make a lot of sense. It makes less now…at least, at this level. We may be about to see a different level.
