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Inflation Guy’s CPI Summary (February 2025)
Look, I know that traders sometimes think their job is to overreact. And media folks benefit from overreacting. And political strategists have been genetically bred to overreacting. But a bit of rational analysis here is probably worthwhile.
The obvious backdrop to the CPI release this morning is the somewhat-greater-than-usual volatility in the equity market,[1] and some concerns that the economy might finally get that recession that I and others have been expecting for so long – although don’t get too chippy on that, since the Q1 contraction would be mostly due to a surge in imports from front-running tariffs. The narrative has shifted back to the question of how soon the Fed might ease, even if inflation is still a little problem, since Unemployment has risen to the nosebleed level of 4.1% and stocks are in the crapper (technical term).
Geez folks, take a chill pill.
Similarly, don’t cue the trumpets just yet on inflation. The expectations coming into today’s figure were for +0.31% on headline CPI and +0.30% on core CPI. The actual prints were +0.22% and a delightful +0.23% on Core.
Sure, the chart shows this is definitely better than last month! And it’s even better than the average of the last two months (I’d said last month you probably should average between December and January figures). But…it’s also a little early to take a victory lap. Here is Median CPI (last point, as usual, is my estimate for today).
If it’s 0.29% m/m, as per my estimate, then we are at a 3.5% run rate. And that’s basically where we have been over the last six months. Oh, and while y/y Core CPI is down to 3.1%, it’s at 3.5% over the last three and the last six months. We are settling in at the mid-3s.
The culprits behind last month’s spike were used cars, health insurance, lodging away from home, pharmaceuticals, and hospital services. Of those, only Used Cars (+0.88% m/m) contributed very much to this month’s number. On the other hand, Airfares dropped -4% m/m. Here are the Major-8 categories.
The optimistic view is that there isn’t any one category that looks out of control on a y/y basis. That’s also the pessimistic view, because it speaks of a broad – if not particularly high – inflation that is still percolating out there. Core Goods this month was still -0.1% y/y, but Core Services dropped from 4.3% to 4.1% y/y. Pharmaceutical prices, which just had their largest monthly rise in history last month as drugmakers tried to get their licks in before the Trump Administration forces them to lower prices, rose only +0.18% m/m this month. Both Primary Rents and Owners’ Equivalent Rent were +0.281% m/m. These are also settling in, on schedule.
“Settling in” is what is happening in shelter. And that again is both good news and bad news. A lot of the forecasts we have seen over the last couple of years that called for inflation to steadily return to trend depended on the assumption that the rent declines we have seen for new rents in a few cities would become a broad-based trend in all of shelter. But it’s not, for two reasons. On the rental side, costs keep rising for landlords (that’s the basis for our model in the prior chart). And on the home purchase side, there’s just still a big deficit in homes available for sale.
While that could change – it seems to be changing in the Washington, DC area but the people leaving Washington still need homes elsewhere – if deportations pick up a lot, there is no sign yet that shelter is going to do the heavy lifting of getting inflation back to 2%. Neither is SuperCore, although this month it was +0.22% m/m and in general is looking a little better.
But none of this looks exciting. None of this looks like it’s going to be the start of a Fed victory lap on inflation. Even the Enduring Investments Inflation Diffusion Index looks like it’s settling in, and like all of the other stuff we have looked at, it’s settling in at a level higher than pre-COVID.
And while we’re talking about distributions, here’s another one I haven’t run in a while. This is the distribution of y/y changes by the lowest-level CPI components. The big spike in the middle is obviously housing. There is a cluster between 1% and 4%. But look at that big left tail. 20% of the basket is actually deflating, y/y.
What’s interesting about that column on the left is that it is a whole bunch of little things. Breakfast cereal. Pasta. “Other meats” (shudder). Potatoes. Tomatoes. Soups. Snacks. Window coverings. Dishes. Men’s shirts. Audio equipment. In other words, a whole lot of things that are so small, consumers don’t really notice them so much and so they don’t really affect their sense of inflation being high. But they notice eggs.
So this is good news…in that a lot of things are deflating…but also bad news is that a lot of these are things that tend to mean-revert. You’ll notice that some of the categories I just listed are core goods, which are still in deflation…but which are also the things which are going to rise in price when the tariffs start to hit. The largest single piece still in deflation is New Cars, at a 4.4% weight or so. Unfortunately, that’s not going to be in deflation when tariffs hit auto parts and slow the import of non-US vehicles.
So let’s wrap this up.
The conspiracy nuts will say that Trump cooked the numbers, because it was better-than-expected about something that was a campaign promise of his. But this is normal variation, and the bottom line is that the inflation figures look to be converging on 3.5% or so, before the effects of tariffs kick in. The near-term effects on inflation are definitely upwards. Peace in Israel and Ukraine, if it comes, may put a small damper on energy prices but the bigger effect there is US energy being unleashed again, which will take some time. But outside of the peace effect, there are few good near-term trends but also few really bad near-term trends other than the (relatively small) effect of tariffs. Inflation is settling in.
The funny thing is, I don’t think the Fed cares. I think they’re satisfied enough with the progress on inflation, and they still think that recessions cause disinflation (they don’t) so that they feel they can focus on the growth part of the mandate, for now.
[1] Dubbed a ‘crash’, or ‘freefall’, or some other appellation by observers who can’t remember the last time we saw a 10% pullback. Which is only about 6% if you look at the equal-weight, or a 60-40 blend of stocks and bonds. If this warrants the “what do you say to Americans who now can’t retire because they’re seeing their retirement accounts collapsing” line, my answer would be “I would say those Americans probably shouldn’t have been invested in stocks at all if this causes them to delay retirement.”
Inflation Guy’s CPI Summary (December 2024)
It is important – and I say it every year – to remember that when we are looking at economic data from December (and in many data series such as Employment, January as well) there are massive error bars around the numbers. The government doesn’t report error bars, but they should. Frankly, when it comes to Nonfarm Payrolls, I barely glance at the number because it just doesn’t mean very much.
The problem isn’t so dramatic in CPI at the headline index level, because the main sources of volatility in the index also happen to be the ones that provide all of the seasonal adjustments, so we tend to miss estimates roughly as often in December as in other months. As we go through the numbers today, however, you’ll notice a bunch of things swinging one way after swinging the opposite way last month. That’s the sort of thing that can easily be caused by the placement of Thanksgiving, so you can see reversals from November’s number to December’s. I am not saying that everything in the CPI report today is infected by that effect; just keep it in mind.
Now, while I say the ‘problem’ of seasonal volatility isn’t as bad in CPI at the headline level, recognize that December sees the most-severe seasonal adjustment to the headline figure. Here are the seasonal adjustment factors for 2023 (they don’t change much). A number below 1.0 means that the seasonally-adjusted headline number will be higher than the nonseasonally adjusted number, because the seasonal pattern ‘expects’ the weakness, and vice-versa. You can see that December is the month furthest from 1.0. What you can’t see from this chart is that if you want to get technical about it, December is also the only month for which we could really reject the null hypothesis that the adjustment factor is 1.0…in other words, the only month where we are really confident that the effect is to cause the NSA CPI to be lower than the average month. November, maybe.
As an aside, this is why April maturity TIPS tend to have higher yields than January maturities. The January TIPS mature to an index that is an average of October and November CPIs, while April TIPS mature to an index that is an average of January and February CPIs. So April TIPS always get an extra December CPI in them, and if there’s one month you don’t want, it’s December. So April TIPS have to have a slightly higher yield to entice people to hold them.
Right, that’s a big prelude discussion. Summing up: don’t get too excited either way with this number. More important is that the overall market has been selling off. 10-year breakevens have risen 14bps, and 10-year real yields have gone up 26bps. How much of this is because of a fear that inflation is turning, is unclear. But in December, the overall data was pretty close to expectations. Core inflation came in at +0.225% m/m, compared to expectations of +0.25%, which is less dramatic than it looked when rounded and it printed at 0.2% vs expectations of 0.3%. A small miss lower, and to be fair the best core number since July.
Headline was only 0.04% NSA…which gets adjusted to +0.39% when the seasonally-adjusted number is reported. See what I mean? So we look at the y/y numbers, which basically replaces last December with this December (thus neatly avoiding the seasonality issue). Y/Y headline CPI rose from 2.73% to 2.90%, and Y/Y core fell to 3.25% from 3.30%.
You may notice that none of those numbers looks like it’s at 2%. Nor is Median CPI, which was (my estimate) +0.31% m/m, the highest since September. If I’m right about that print then the y/y would drop to 3.86% from 3.89%.
So on the macro side, top-down, this does not look like the sort of data that the Fed was expecting when it started easing in September. Since in my opinion this has been eminently foreseeable for a long time when you looked at what was driving CPI, the conclusion must be either that the Fed is just incompetent when it comes to inflation forecasts, or it doesn’t care about inflation, or the rate cut had nothing to do with economics and was just a political gambit to get Harris elected. None of those answers is flattering. I suspect answers #1 and #3 are the main drivers of the most-recent policy error.
The good news in the inflation figures is that there’s no one major group that still looks alarming.
When we drill down to the monthly data this month…that’s where you see the seasonal volatility. For example:
- Used Cars was expected to be roughly flat. It was +1.2% after +2.0%.
- Rents rebounded; OER and Primary Rents were +0.31% after +0.23% and +0.21% respectively last month.
- Lodging Away from Home was -0.95% this month; it was +3.16% last month.
- Airfares were +3.93% this month; they were +0.37% last month.
- Car and truck rental +0.58% this month; -2.99% last month.
- Baby Food +0.42% this month; -0.12% last month.
- Medicinal Drugs +0.08% this month; -0.10% last month.
- Doctors’ Services was lower, +0.06% vs +0.28% in November; but Hospital Services were higher at +0.23% compared to 0.00%.
A few broader observations. Core Goods and Core Services both continue to move back towards zero: goods from underneath and services from above. CPI for Used Cars is still -3.4% y/y, and I’d expect it to slowly recover from the spike and reversal stemming from COVID. But we now have an extra factor, and that’s the devastating California wildfires. There are two things you see burned out in every picture. Vehicles, for one. Used and New car inflation is going to turn higher, and maybe quite a bit, going forward as people in California need to replace their wheels. Over the medium term, the dollar’s strength would help keep core goods inflation tame and even slightly negative, but thanks to the wildfires we are likely to see core goods back above zero shortly.
And the other thing you see burned out, of course, are houses. Primary Rents have been slowly converging with our model, but rents are going to get goosed in California immediately and that effect will be smeared out because of local laws against ‘price gouging’ that prevent landlords from hiking their rents immediately to the equilibrium level implied by lots more demand and lots less supply. So they’ll hike, but it will take longer. This is mainly a California effect, naturally, but it will be large enough to affect the national numbers.
Incidentally, you’ll also see these in Lodging Away from Home inflation not just in California but in the entire western US. And maybe further, since remote work makes it possible to temporarily relocate almost anywhere. Federal support of the displaced will ensure that is not a 1-month effect. So in shelter, January and February (and beyond) numbers are going to be a lot more important than today’s release.
I am sure that will be used later to argue that “this inflation in 2025 is all due to the wildfires,” but we should remember that inflation in 2024 was (at best) leveling out and possibly hooking higher again. Broad core inflation ex-shelter has now risen four months in a row. It isn’t alarming, at 2.12%, but it isn’t just shelter keeping inflation above target and the story in early 2025 won’t be ‘all about shelter and cars.’ Supercore is also improving, but it isn’t going to pull the overall CPI down to target if Shelter doesn’t keep decelerating and as Core Goods goes back positive.
Supercore is indeed looking better, but we still have wages rising at 4.3% y/y. Remember that wages and supercore are modestly cointegrated. Or, in English, supercore is where wage-driven inflation tends to live. Wage growth needs to soften a lot more in order to get supercore back to target-like levels.
Again, all of this is December and in January we have had a massive natural disaster that will affect inflation data as soon as next month – and for months going forward. This will obfuscate the fact that the Fed already made a second policy error (after the COVID-era error of adding too much liquidity and not pulling it back quickly enough), dropping rates prematurely and letting money growth re-accelerate (M2 y/y is at 3.7%, but annualizing at 4.7% over the last 6 months and 5.8% over the last quarter ended in November). The bottom line is that the December inflation data is just not very important. What happens next…and what is already happening…is the story that will drive inflation and markets in 2025.
(Admin note: I missed doing the CPI Report podcast last month but it will post this month again! In roughly an hour, I suspect).
Inflation Guy’s CPI Summary (November 2024)
(Administrative Note: There will be no podcast today.)
Last month’s CPI had set up an uncomfortable situation for the FOMC, where too-high inflation was colliding with a Fed that had launched too soon into ease mode – for what appears to be mostly political reasons although there is some mild weakness in economic growth. Preemptively attacking slightly soft growth, in a time of frothy markets and CPI that is sticky at a too-high level, might still turn out to be a clever policy move…but that’s a narrow window.
So the Fed would like to see softer CPI, which validates their professed confidence that it is returning to quiescence like an obedient puppy that has been scolded by the wise people in the Eccles building. Wouldn’t we all like that?
There is some cover provided by inflation markets. Before today’s number, here are the most-recent prints taken from the CPI ‘fixings’ market, showing that the market is pricing year-over-year headline inflation to be at 2.14% by April’s print (in May), before rebounding as those quirky low prints from earlier this year are pushed out of the average.
But is that all there is? If headline can only get to 2.1%, briefly, despite soft energy markets, then can the Fed really be very optimistic that core (in the mid-3s) and median (in the low 4s) will show inflation fully tamed? It’s hard to believe. So the Fed has a lot at stake here and needs inflation to keep decelerating. Not just on a y/y basis; the m/m numbers need to start looking better. We have had three straight uncomfortably high core CPI readings in a row after the it-now-seems-like-an-aberration-low blip earlier in the year, and four straight median CPI figures. Consensus before today’s report was for 0.26% on the seasonally-adjusted headline figure and 0.28% on core. Neither of those is what the Fed is really looking for. Worse, they didn’t even get that.
These are not alarmingly high, 0.31% when the market was looking for 0.26% or 0.28%, but keep in mind that our recent benchmark for alarm has been a bit skewed by a period of time when the forecasters were missing by 0.1% and 0.2% on a regular basis! It’s a modest miss. But it’s a modest miss on the wrong side.
Core goods continued to rebound slowly back towards 0%, now -0.6% y/y, while core services slowed further to 4.6% from 4.8%.
The rise in core goods was driven significantly by a second monthly jump in used car prices, +2.72% m/m after +1.99% last month. The lengthy mean reversion of used car inflation is over. That was one big factor keeping core goods prices submerged, and without it (New Car prices were +0.58% m/m also, for what it’s worth) core goods should go back to roughly flat or slightly positive. The strength in the dollar would normally keep core goods from getting too out of hand, but of course if you believe Trump’s tariff threats – and even if you don’t, but figure it implies more nearshoring – then you should expect Core Goods to be positive going forward. Core services has a lot to do with rents, which this month were much lower than last month’s change (0.23% m/m vs 0.40% last month on OER; 0.21% on Primary rents vs 0.30%). The deceleration here continues…although remember that last year we had been promised healthy deflation in rents this year. Never got even close to that.
Now, there is some good news here. Some of the overall miss this month can be traced to a 3.16% m/m rise in Lodging Away from Home. This means that Core Services ex-Shelter (“Supercore”) had a healthy deceleration and that’s good because that’s the sticky stuff. It’s still far too high, though.
Similarly, the more-well-behaved measure of Median CPI was up only 0.255% m/m (my estimate), which brings y/y Median to about 4.04% y/y (was 4.08%). This looks a little better? Anyway the lowest m/m since June!
I don’t want to make too much of this…the fact that Lodging Away from Home was a significant part of the miss doesn’t make this a great number. Nor does the continued deceleration in rents. 0.255% for twelve months would still leave Median CPI over 3%. And the major groups look alarmingly normal without four of the categories above target and four of them below target.
And I guess that leads us to our conclusion. I had said last month that I thought the Fed would find a reason to hold rates steady at this upcoming meeting, rather than continuing to cut. But markets don’t believe that, and market pricing implies a good chance of a further 25bps cut at this month’s meeting. To be fair, Fed speakers have been seeming to guide markets in that direction with expressions of concern about the weakening labor market. But I think there’s something worse than investors starting to be concerned that the Federal Reserve makes policy moves on the basis at least partly of political ideology. After all, that’s at best an every-four-years thing. What would be worse would be for investors to believe that the FOMC is content with inflation above 3%, and willing to focus on employment if there’s even a hint of weakness there. That’s the wrong approach, because employment is cyclical while inflation isn’t. While I don’t believe that ‘inflation expectations anchoring’ is a real thing we should be concerned about, ‘Fed credibility’ is. While inflation was decelerating, the Committee could, with some hand-waving, pretend that it was addressing both inflation and growth and merely getting ahead of the recession. If inflation is hooking higher again, that story will be harder and harder to sustain.
I don’t know that core or median are yet hooking higher. But they’re no longer placidly declining. My guess is that the Fed will pause the rate-cutting campaign shortly, but stop the balance-sheet runoff, and try to play both sides of the net. The game is getting much harder from here.
Inflation Guy’s CPI Summary (September 2024)
I already have my title for today’s CPI Report podcast (you can find all of my podcasts at https://inflationguy.podbean.com/ ). I’m going to call it ‘Inflation Peek-a-Boo.’ With today’s number being definitely on the ‘boo’ part of things.
First, a review: last month, August’s report missed higher. But the miss was mostly due to the quirky jump in Owners’ Equivalent Rent. Outside of that, CPI had been okay – not great, but moving in the right direction. The Fed eased 50bps anyway (at the time I said the miss in CPI wouldn’t deter that), setting up what will be the headlines for the next week now. Because of the strength in the Employment report, some people were already questioning whether the Federal Reserve made a policy error in starting to move rates back towards neutral so quickly. But as long as inflation was heading back to their target, neutral would still make sense even if the jobs market wasn’t weakening (as it still looks like it is, outside of government spending). The questions now get a little more pointed because today’s CPI miss higher was not due to a one-off.
The consensus of economists coming into today was for a +0.10% rise in the seasonally-adjusted CPI. Now, energy this month was expected to be about a -0.17% drag on the number (it turned out to be 13bps rather than 17bps), so this low m/m print was scheduled to be mostly due to last month’s slide in energy prices. Still, decent optics especially with the last CPI we’ll see before the election. Economists saw +0.24% m/m on core. The actual figures were +0.18% m/m on headline CPI and +0.31% m/m on core CPI. This is unfortunate, because the y/y Core CPI number rose, instead of being flat, to +3.26% y/y. Moreover, the overall shape of the monthlies…well…see for yourself.
We have to be careful about the cognitive bias that makes us see stories and trends where there aren’t any, which is why it’s so very important to not focus on one month’s number. Or two. But if you look at this chart, it sure looks like the outlier might not be August and September, but May and June. Doesn’t it?
Ditto that for the Median CPI (last point estimated by me at +0.33% m/m).
Again, it could be a cognitive error but this sure looks like we’re pretty steady around 0.3%. If sustained, that would be in the ‘high 3s’, and it is time for my monthly reminder that I think median inflation will settle in the ‘high 3s, low 4s’ although it could dip into the low 3s first. (It’s looking more and more like the dip into the low 3s may not happen, as we get further along in the adjustment of rents.)
So where did this high miss come from? It wasn’t from OER and Primary Rents, which were back into their slowly-declining mode. OER was +0.33% m/m, and Primary Rents +0.28% m/m. Year over year, Primary Rents are down to +4.8% y/y. My model has them eventually ending up around 3.8%, after dipping lower. But they should be dipping right now, and they’re not. They may simply be converging on that 3.8%ish level.
But here’s an interesting chart. Remember how I have been saying for a long time that a good part of the overall deceleration in inflation had come from Core Goods, which would not continue to plumb new deflationary depths? This month, Core Goods was only -1.0% y/y, versus -1.9% y/y the last time we got these numbers.
Now, that doesn’t look wildly inflationary but if core goods inflation goes merely back to flat, then core services needs to do a lot more heavy lifting. Core Services did drop to 4.7% y/y from 4.9% y/y. But flat on core goods and 4.5% on core services wouldn’t get us back to the Fed’s target. Not even close.
In the core goods category, there were rises in Used Cars (+0.3% m/m) and New Cars and Trucks (+0.15% m/m), but nothing terribly out-of-the ordinary. Similarly, in core services there wasn’t much out-of-the ordinary. The problem is, ‘ordinary’ looks like it’s not at the Fed’s target. Medical Care Services were higher, with Doctor’s Services +0.9% m/m and Hospital Services +0.57% m/m. Airfares rose +3.16% after +3.86% last month. Motor vehicle insurance continues to rise, +1% m/m, with the only good news being that the y/y figure on insurance is now down to ‘only’ +16%. But +1% per month still is a rate above 12% per year – not too exciting.
Car and truck rental was also +1.2% m/m. So, in transportation outside of the cost of energy itself, it was a rough month (but that’s what happens, I guess, when you try and force people to buy electric cars when they don’t want them). But it wasn’t just transportation goods and services, either. This is the time of year when the jump in college tuitions happens. And it looks like the jump in tuitions this year is the largest since 2018. The seasonally-adjusted numbers will smooth this out, but that means tuition is going to be adding a little more over the next 12 months than it added over the last 12 months.
This is also somewhat surprising. Normally, when asset markets are going gangbusters we tend to see smaller increases in tuition because endowments are doing well and the financial model for colleges is basically (exogenous cost increases we don’t really try to control, minus endowment contributions or federal support, divided by number of students). If markets are doing well and college tuitions are still accelerating, it implies an increase in costs. My guess is that insurance is part of that, but so will be teachers’ salaries. Provision of education is ‘labor intensive,’ and wages continue to refuse to slip back down to the old levels. This is also the reason that Food-Away-From-Home was +0.34% m/m and continues to hang out around +4% per year.
And, as a result of wages refusing to moderate, ‘supercore’ (core services ex-shelter) also continues to refuse to slip back to the old levels.
The bottom line is that this number is not high because of any weird one-offs. In the same way that last month’s number was generally okay in a balanced way, outside of rents, this month’s number is generally less pleasant, in a balanced way. I don’t think we are at the start of another spike higher in prices. But we continue to aim for ‘high 3s, low 4s.’
And this will be an unfortunate story for the Fed as they will be peppered with questions about a potential policy error. I will repeat here what I said last month:
“To be clear, I personally do not think the FOMC should stop quantitative tightening and there’s no hurry to cut rates. The fight against inflation is not only unfinished, it won’t be finished for quite a while…and an ease now will just make it harder later. But that’s what I would do. What I am saying is that the Fed is not likely to change course on the basis of this number.” As expected, the Fed did cut rates 50bps. I am not sure this is necessarily a terrible policy error, although starting with 50bps now looks like an obvious mistake. Getting rates back to neutral, around 4% or so, is not a bad idea as long as quantitative tightening continues. It isn’t the best idea, but it’s not a disaster. But this raises the stakes for the next FOMC meeting. If the Fed skips the meeting, it will be a tacit admission that the first move was a mistake. If the Fed piles on another 50bps, it will show they are terrified about growth or simply don’t care about inflation. I suspect 25bps is the only choice they can make which will make almost everybody equally unhappy. There’s more data to come before that meeting, but the FOMC’s path has narrowed considerably as inflation remains sticky.
Inflation Guy’s CPI Summary (August 2024)
Let me start with the punch line, which I think will not be a very common take: this report does not stop the Fed from easing 50bps next week, and honestly doesn’t really even hurt the chances very much.
The inflation swaps market was pricing in 0.05% on an NSA basis, roughly 0.13% on a SA basis. Actually, that market was better offered, with traders either expecting a weaker number or wanting to hedge that possibility more than the chance of a stronger number. Economists gathered around a consensus of 0.16% for headline, and 0.20% on core CPI. The actual print was +0.19% m/m on CPI, and +0.28% on core CPI, bringing the y/y numbers to 2.59% and 3.27% respectively. It was the worst monthly core print since April, and the initial market response was predictably poor.
My early estimate of Median CPI for the month is +0.26% m/m, bringing the y/y median to 4.16%. (Sharp-eyed readers will note that neither headline, nor core, nor median CPI are at the Fed’s target).
Interestingly…at least, if you’re the kind of square who finds the CPI interesting…the y/y changes in Core Goods (-1.9%) and Core Services (+4.9%) were steady. That’s the first time in a while we’ve seen that.
Wow, right? A rounded +0.3% on core CPI takes the Fed out or at least puts them on a 25bps cut, right? Well, not so fast. The monthly change in Owners Equivalent Rent immediately jumps out at you (at least, if you’re the kind of square who looks at these things deeply) as +0.495% m/m. That’s the largest m/m change since February, and it hasn’t been appreciably higher on a regular basis since early last year.
That looks a little quirky, especially following the recent dip. And it looks suspiciously like a one-month-lagged chart of the m/m changes in Primary rents, which dipped a few months ago before paying it back last month.
That looks to me like some weird seasonal wrinkle. The y/y shelter figures are still declining. But, if you look carefully, you can see that the rate of improvement is slowing. And maybe my math isn’t so good but it doesn’t look like these are converging on deflation.
The rents data are therefore both the good news and the bad news. The good news is that in this month’s CPI, it was a miss higher only because OER had the quirky jump. I’ll get into more of the number in just a second, after sharing the bad news: there is nothing in the trajectory of rents to suggest that the operating theory of many forecasters for a long time – that rents would soon be in deflation – is going to happen. Heck, as I keep pointing out the trajectory of rents is higher than my bottom-up rents model, which suggested we should be bottoming out around 2.4% y/y right about now. And my forecast was on the very high side of what people were saying.
But let’s get beyond rents. The ‘big sticky’ is always important to watch, but outside of rents things looked pretty good this month. There were some outliers on both sides (Lodging Away from Home +1.75% m/m, Airfares +3.9% m/m after 5 straight declines; Car/Truck Rental -1.5% and Used Cars -1% m/m), but core CPI ex-shelter declined to only +1.72% y/y. The list of monthly categories shows a long list of categories whose price fell m/m: jewelry, car/truck rental, used cars, energy services, miscellaneous personal goods, personal care products, household furnishings and operations, medical care commodities, medical care services, recreation, communication, and a few others. Not that we are headed for deflation, but look at this distribution of y/y price changes. I haven’t shown this for a few months.
Again, this doesn’t look like something that screams deflation, but the far right tails are all moving left. There’s still a cluster around 4-5%, which shouldn’t be surprising since Median CPI is at about 4.2%. Do also notice that there aren’t a lot of categories showing deflation on a y/y basis, but if you take out shelter from this you get something that looks more disinflationary: a mode around 4-5%, but tails to the downside. In inflationary periods, the tails stretch to the upside, and we had that for a while; but the signature of the overall distribution is encouraging.
The conclusion, as I said up top, is that if the Fed was leaning towards cutting rates 50bps next week this is not a number that should change their collective mind very much. Unless the Fed cares only about the top line numbers, this isn’t an alarming report. It isn’t the lovely deflationary print that bond bulls wanted, but that wasn’t really in the cards. We’re arguing over a couple of hundredths in the monthly core print, and that is entirely attributable – still – to shelter. In fact, there are signs of broadening disinflation. To be clear, I personally do not think the FOMC should stop quantitative tightening and there’s no hurry to cut rates. The fight against inflation is not only unfinished, it won’t be finished for quite a while…and an ease now will just make it harder later. But that’s what I would do. What I am saying is that the Fed is not likely to change course on the basis of this number.
The y/y figures for headline CPI are going to keep dropping for a few months here, partly on base effects and partly because energy prices are very weak. A perfectly reasonable trajectory for monetary policy (if you think that rates ought to at least be eased back to neutral in the 3-4% range) would be 25bps next week, and then larger cuts in a few months when the headline inflation number is lower and the unemployment rate is higher. The only problem with that approach is that an acceleration in the pace of easing later may look like concern, which is why some FOMC members favor getting out of the gate quickly. As I said, there’s nothing here that should stop that.
But median inflation is still headed for ‘high 3s, low 4s,’ with a potential dip into the low 3s before a reacceleration. The hard work on inflation is still ahead, and it is going to get harder now that we are in a recession.
Inflation Guy’s CPI Summary (July 2024)
It was only a few months ago (with the March CPI report in April) that I was talking about a ‘Potential Pony Situation’ in my podcast when, after an unsettling Core CPI, I pointed out that the Median CPI was much less disturbing. Trying to tell the story of the economy is about figuring out where the underlying trends are, and trying to figure out what you can ignore as ‘noise.’ Back then, it was clear that inflation was heading lower, but not as fast as people were saying, so the bad core CPI was off-putting. It messed up that story. But because we were focused on Median CPI, that month was not so unsettling and we focused (successfully I think) on the fact that inflation was decelerating…but not collapsing back to target imminently. Fast forward, and the story we are looking at coming into today’s CPI is that inflation is still declining, but people are probably getting a bit out over their skis in anticipating (again) a rapid collapse in inflation after a couple of weak CPI prints. Once again, that’s not the story the data is really telling, but deviations from that belief are likely to be painful.
For what it’s worth – I saw a lot of commentary this morning about how “PPI is encouraging,” or “PPI means this or that.” No one in the inflation trading community cares much about PPI. There are some elements of the PPI report that can help with some of the parts of other inflation reports, but the overall number has very little correlation (and no lead) with the CPI. You and I are exposed to CPI. The Fed looks at consumer prices. My best advice about PPI is to ignore it.
When CPI actually came out, it was a touch better than expected on the surface. Economists had been looking for +0.19% m/m on core, and got +0.155% on the actual number. What was fascinating to me was the market reaction. Equity futures appear to be completely flummoxed by an as-expected number, vacillating around unchanged 20 minutes later as I write this. I think this tells you something, actually – folks coming into today weren’t trading the actual number but rather planning to trade what other people thought about the number. Everyone thought everyone else knew what a higher-than-expected or lower-than-expected number would do. An as-expected print means you have to dig into the details, and equity guys don’t like details. They like big pictures. Thick lines. Crayons.
So let’s look at some pictures. Here are the last 12 core prints and the 8 major subcomponent pieces.
The first thing that jumped out at me was that core goods again plumbed new 20-year lows. Yes, that’s 20-year lows, as the following chart shows. -1.9% y/y.
Folks, I am still waiting for the turn and I say every month “surely, it can’t go lower than that.” So far, so wrong. The dollar is no longer strengthening in a straight line, and hasn’t been for a while. If anything, it’s weakening. Apparel this month was -0.45% m/m, and only 1.1% y/y. Apparel is almost entirely imported, and at some point a steady-to-lower dollar will mean that core goods heads back to flattish. (Also, keep in mind that both Presidential candidates have expressed pro-tariff positions, but that’s a 2025 story at the earliest).
Within Core Goods, we also saw Used Cars decline yet again. This month it was -2.3%. CPI had diverged a bit from the private surveys, but with this month has basically converged back to the number implied by Black Book. That doesn’t mean Used Car prices won’t decline further, but there’s no longer a reason to expect “bonus depreciation” going forward.
Now, in the first chart above note that Core Services dipped to 4.9%, the lowest it has been in a while also. Within core services, we saw Airfares decline again (-1.6% m/m after -5% last month), but the interesting thing is Hospital Services. The other parts of Medical Care, that is Physicians’ Services and Medicinal Drugs, were both in line with recent trends and on top of last month’s figures. Hospital Services plunged -1.1% m/m. The y/y is still pretty high at 6.1%, but if this number is prologue (I sort of doubt it) then this upward pressure will abate.
The fact that services dropped so hard helped to bring “SuperCore” down a little bit. It is still elevated, and frankly the trend doesn’t look wonderful. You want 50bps in September? You need more than this, pal.
Do you know what I haven’t mentioned yet? Shelter. Shelter is the biggest and stickiest piece, and the foreordained deceleration of shelter is part of the religion of everyone who thinks we will decline to 2% core inflation and remain there (which is basically where breakevens are these days). Bad news – this month, Primary Rents rose 0.49% m/m and OER rose 0.36%, compared to 0.26% and 0.28% last month. This is where it’s useful though to look at the y/y numbers. That big surprise in Primary Rents produced an unchanged y/y number and OER still decelerated to 5.30% from 5.45%. The wonder of base effects!
So let’s harken back to the beginning of this piece. In ‘A Potential Pony Situation,’ the Median CPI warned us to not get too worried about the surge in core because Median was pretty well-behaved. In the current circumstance, Median tells us to not get too excited by all of those people who will be talking about how low the 3-month average is (I guarantee that old chestnut will make a reappearance this month), because Median will be something like 0.268% (my early estimate). This will be the highest since April, if I am right.
The bottom line remains the same, and that is that inflation continues to decelerate but median is going to end up in the “high 3s, low 4s.” I keep thinking that we will dip below that for a little while when the base effects of shelter pass through, before reaccelerating to what I think is the new ‘normal’ level, but shelter is being persnickety and resistant to that deceleration. Either way, there is nothing here that would encourage the Fed to aggressively ease 50bps. Or, for that matter, to ease at all. If the Fed eases in September (which I expect, even though if I were a member of the Board I wouldn’t vote for one), it will be because its members fear recession and not because there is evidence that inflation is licked. That evidence is still elusive.
Inflation Guy’s CPI Summary (June 2024)
Let’s set the stage. Last month (May’s data), core CPI printed at +0.16% and +0.25% on Median. But a lot of that, most of it, was core goods and the question was whether that month was a one-off due to be reversed at some point, or if shelter and other slower-moving things would come along. Coming into this month, the economists’ consensus was for +0.21% on core; the inflation swap market trades headline inflation but actually implied something a tiny bit softer than the economists were expecting. We knew Used Cars was going to be weak again, but it seemed like people were all-in on the idea that the worm has turned and now inflation is going to head sharply lower.
Whether this turns out to be true or not, it’s important to realize that the reason economists think that is because unemployment is rising, indicating that we are either in or very near a recession, and economists think (against logic and data) that wages lead prices so this should herald a disinflationary pulse. Now, I also think inflation is headed lower, but it’s because shelter is coming off the boil and not because the Fed successfully cracked the backs of labor.
So what happened this month?
We saw a very weak headline number of -0.06%, which was mainly the fault of a very weak core inflation number of +0.06%. That’s the second quite weak core figure in a row, and when median CPI comes out later today it should be even weaker than last month, at +0.195% or so. If we could repeat that median every month, it would be tantamount to inflation being at the Fed’s target because median normally tracks a little higher than core except when we are in an inflationary upswing.
But whereas last month’s inflation figure was all about core goods, this month we finally saw a bit of a deceleration in shelter. Okay, yes – core goods slipped further into deflation, because that category exists mainly to make me look stupid by going lower and lower when I keep thinking the disinflation must be nearly wrung out. Core Services dropped to 5.1% y/y from 5.3% y/y.
We had known Used Cars would be weak, and it was at -1.5% m/m. New cars also dragged. But I will say it again because I want to have the chance to appear stupid again next month: goods deflation is running its course. Global shipping costs are rising again, the dollar will be vulnerable if the Fed begins to ease, and while used cars should continue to show large y/y declines for the next few months that’s mostly base effects. On an index level, the used cars price index is almost all the way back to the overall price level. Since COVID, the general price level – what has happened to the average price of goods and services – is up 22.3%. Used Car prices are now only up 27.7%. Not all goods and services will move up exactly 22.3%; the point is that the dislocation in used cars is pretty much over and therefore we should expect at some point that used car inflation will start to look more like overall inflation.
But again, goods aren’t the story we really care about. The question is, what about services? The news here is all non-bad. (Some of it is good, some is just not bad.) This month, the story is that rents abruptly weakened on a m/m basis. Primary Rents were +0.26% m/m (was +0.39% last month), and Owners’ Equivalent Rent was +0.28% (was +0.43% last month). This dropped the y/y rates to 5.07% and 5.45%, respectively.
That’s good news, but it is not unexpected news. The conundrum over the last 3-6 months has been why this wasn’t already happening. On a m/m basis, the rent numbers probably won’t get a lot better, but if they print around this level consistently then the y/y rent numbers will decelerate gradually. Unfortunately, there is no sign of deflation in rents and they are likely to begin to reaccelerate later this year, or early next year. That is an out-of-consensus view, though, and you should keep in mind that the Fed believes we have imminent deflation in rents.
In addition to the softer rents numbers, Lodging Away from Home showed -2% m/m. However, like airfares (-5% m/m), LAFH is not something that is going to be a persistent large drag. It’s volatile. On airfares, this decline in prices matches nicely with the energy figures we saw yesterday that showed a surprising fall in jet fuel inventories. Prices dropped and people flew!
Moving on to “Supercore.” People made a lot last month of the m/m decline in core services ex-shelter, and they’ll make a lot of the fact that it declined m/m again this month. But that looks like a seasonal issue: last year the two softest months were also May and June. On a y/y basis, supercore showed another slight decline. Medical Care Services is 3.3% y/y, with Physicians’ and Hospital Services both holding pretty steady at a high level. I don’t see any major improvement in supercore yet.
Overall, there’s no doubting that this number is soothing for the Fed. It’s soothing for me too. Inflation is decelerating, and as I said last month I think the Fed will almost certainly deliver a token ease in the next couple of months.
The potential issue is that inflation isn’t slowing for the reason the Fed thinks it is. The economy is slowing, and unemployment is rising. I don’t know when Sahm first said it, but for decades I’ve been noting that when the Unemployment Rate rises at least 0.5% from its low, it always rises at least 1% more (here’s a time when I said it in 2011: https://inflationguy.blog/2011/07/10/no-mister-bond-i-expect-you-to-die/ ). Not that I’m bitter that it’s called the “Sahm Rule” now.
So yes, the economy is weakening and the labor market is softening. And that presages a deceleration in wage growth – or, really, a continuation in that deceleration. But the connection between wages and prices is loose at best, and that’s not why inflation will stay low, if it does. In fact, I continue to believe that median inflation will end up settling in the high 3s, low 4s. There has always been an ‘unless’ clause to that belief, but it isn’t ‘unless we enter recession.’ We will enter into one, and probably already are, but recessions and decelerations in core inflation are also only a loose relationship at best. It isn’t the recession which is causing disinflation (after all, the disinflation started long before now). What may is the slow growth in the money supply, combined with the rebound in velocity eventually running its course. We are closer to the end of the velocity rebound than to the beginning, and while M2 is accelerating it isn’t problematic yet. Those are the nascent trends to watch closely.
In the meantime – the Fed has what it wants for now. Soft employment and softening inflation. An ease will follow shortly. Whether that is followed by further eases remains to be seen, but…for now…the trends are favorable for the central bank.
Inflation Guy’s CPI Summary (Mar 2024)
After a week when the NY/NJ area saw an earthquake, an eclipse, and a gorgeous 75-degree spring day, it is time to get back to work.
Today’s CPI report was not expected to be particularly great. In fact, one of the biggest conundrums of market behavior recently has been the question of why investors seemed to remain very confident that the Fed will cut rates several times this year, even as forecasts for the path of inflation have backed off of what they were last year (when most forecasters had core CPI returning placidly and obediently to the neighborhood of 2% this year). The a priori consensus forecasts for today’s CPI figure were +0.28% m/m on core and +0.33% m/m on headline. The Kalshi market was in line with that, although CPI swaps were a touch lower on headline at +0.29% (seasonally adjusted, but CPI swaps trade NSA CPI). That’s not wonderful: 0.28% on core would annualize to 3.4% y/y.
The assumption has been that even if in March we are annualizing to 3.4%, the coming deceleration in rents will push everything back down to where it needs to be. The problem with this has always been (a) the strongly-held belief that rents would slip into deflation this year were never based on good analysis, and more importantly (b) this assumed that nothing unforeseen would happen in the other direction. It is characteristic of inflationary periods, of course, that bad things happen on the upside. So this was always sort of assuming a can opener,[1] but at least forecasts for the current data were reflecting that these things had not happened yet. To be fair, the consensus on core has been low relative to the actual print for four months in a row, but at least folks are forecasting mid-3s, rather than 2.0.
Now, let’s review one other thing before we look at some charts. The recent story boils down to this: sticky rents, sticky wages. While core goods has been pulling down core inflation, that game was running out of room. The next part of core deceleration relies on un-sticking the sticky rents, and sticky wages.
So here we are. Today’s figure +0.36% on core CPI, +0.38% on headline (seasonally adjusted on both). This makes the last 3 core CPIs 0.39%, 0.36%, and 0.36%. The chart below of the m/m core CPI figures does not really give the impression of a decelerating trend.
We always look these days first at rents, because that is so important to the disinflation story. Rent of Primary Residence was +0.41% m/m, down from 0.46% last month. Owners’ Equivalent Rent was steady, at +0.44%. Remember that there had been some alarm two months ago, when OER for January jumped to 0.56%, that this was due to a new survey method or coverage and it was going to be repeated going forward. That was always pretty unlikely, but now we have had two months basically back at the old level and the January figure appears to be an outlier. 0.41% on Primary and 0.44% on OER is not hot, just sticky. It isn’t going up; it’s just not going down very fast.
Rents will continue to decline. But the failure of rents to slip into deflation is a source…maybe the source…of the big forecast error made by economists about 2024 CPI. Our cost-based model for primary rents, which never got even vaguely close to deflation, has now definitively hooked higher with the low coming in November. Rents haven’t been decelerating as fast as our model had them, but if anything that’s a source for concern on the high side.
Outside of rents, core inflation ex-housing rose to 2.38% y/y. That sounds like “most of the economy is on target,” but that’s not how inflation works. There’s a distribution, and if the ‘rents’ part of the distribution is going to be higher than the target then everything else needs to average something below the target. We aren’t there. And, as I noted above, we’ve squeezed out just about everything we can from core goods. Actually, y/y core goods dropped to -0.7% thanks partly to continued declines in Used Cars (-1.1% m/m) and some decline this month in New Cars (-0.2%). I think the latter might partially reflect discounts on the EV part of the fleet, where cars for sale have been piling up as manufacturers under political pressure have been producing far more of them than people want.
Note that core services, even with the decline in y/y rents, moved higher this month to 5.4% from 5.2% y/y. Some of that was medical care, which was +0.49% m/m driven by another jump (+0.98% m/m) in Hospital Services. The y/y rise in Hospital Services is now up to 7.55% – the highest since October 2010.
Partly driven by hospital services, the ‘super core’ (core services ex-rents) continues to re-accelerate.
Again, this is not what the Fed wanted to see; and it’s driven partly by the stickiness in wages. The Atlanta Fed’s Wage Growth Tracker has decelerated but is still at 5.0% y/y. That’s not the stuff that 2% core inflation is made of.
Let’s take one moment to look at a piece of good news from the report. My estimate of median CPI, which is my forecast variable because it is not subject to outliers like Core CPI, is +0.32% for this month. Because I have to estimate seasonals for the regional housing numbers, actual Median might be a teensy bit higher or lower but in any event the chart of Median CPI is much less alarming than the chart of Core CPI.
I should observe that the news there is not completely good, since a signature of inflationary environments is that tails are to the upside – that is, core is persistently above median. That was true during the upswing, but during the moderation core has gone back below median. But this bears watching, and if core starts to routinely print above median it will be a negative sign. For now, though, the Median CPI is good news. Relatively.
So let’s talk policy.
The Administration always seems to be confused about why, despite strong jobs numbers, consumers consistently report dissatisfaction with the economic situation. There really shouldn’t be any confusion. Consumers, especially those not in the upper classes, hate taxes. And in addition to a high direct take from the government in explicit taxes, consumers are also facing persistent inflation that the Administration says isn’t there. Inflation is a tax, and it sucks worse than direct taxation because you can’t rearrange your consumption very well to avoid it. (You can rearrange your investment portfolio, but a strikingly small number of people seem to have actually done that even three years into this inflation episode. If you’re curious about how, you really should visit Enduring Investments and ask.)
On the other question of policy, and that’s the Fed: I can’t see any rational argument for cutting rates in June. Actually, on the data we have in hand I can’t see an argument for cutting rates in 2024, except for the one the Fed doesn’t consider and that’s that interest rates don’t affect inflation. To cut the overnight rate, the Fed would have to rely on forecasts that inflation is going to get better. And to do that now, when forecasts have been persistently wrong (and not by just a little bit but about the whole trajectory) since 2020, would be incredibly cavalier. The FOMC still consists of human beings, so never say never. And the inflation data should improve as the year goes along and rents moderate. I just don’t see any sign that it’s going to moderate enough to say ‘we’ve reached price stability.’ Sticky in the high-3s, low-4s is still where I think we’re coming out of this.
[1] A physicist, an engineer, and an economist are stranded on the desert island with nothing but a crate of canned food. “How are we going to get the food that is inside of these cans?” asked one. The physicist says “well, we could heat the cans, carefully, in a crucible we make from ocean clays. Eventually the heat will cause the can to burst and we can get the food inside.” The engineer says “that will take too long. What we need to do is take some of these coconuts, raise them up to a great height with a series of ropes I will design, and allow them to smash down onto the cans, breaking them open.” The economist says “I have a solution that is far easier than what you fellows are doing. Here is how we do this. First, assume a can opener….”
Inflation Guy’s CPI Summary (Feb 2024)
I must say that I didn’t see this one coming. Credit where credit is due, though: while Street economists were just a little low (consensus was +0.40% headline, +0.30% core), the CPI swap market at least got headline right (there being no market for core inflation CPI swaps) by pricing in +0.47%, seasonally adjusted. The actual print was +0.44% on headline CPI, and a lusty +0.36% on core. I was lower, even though I got the big pieces right. I had some tails going the wrong way. Let’s get into it.
The things which threw me were airfares and used cars. Based on declines in jet fuel, I had anticipated that airfares would be roughly -6% m/m, and I merely got the sign wrong as they were +6.6%. Jet fuel was tighter on the east coast, and I suspect regional differences there is what caused this wide divergence. If I’m right, then airfares will underperform jet fuel over the next few months. If, instead, it’s a cost-of-labor or cost-of-equipment thing, or if it’s increased pricing power from airlines because of capacity constraints, then airfares won’t drop back and that would be a bad sign.
Similarly, Used Cars continues to outperform the Black Book survey. I had penciled in -1%, and Kalshi markets were around -1.5%, but Used Car CPI came in +0.5%. This is a volatile series, and this miss is only interesting because Used Cars keeps missing a little high compared to the Black Book survey. That could be an issue of sample mix, but I’m not sure. New Cars were -0.10% m/m. Car and Truck Rental was +3.83% after -0.74% last month, so that’s another upper tail. Overall, core goods was steady at -0.3% y/y.
I said I got the big pieces right. I refer to rents. Remember that last month we had a large deviation between Owners’ Equivalent Rent (OER) and Rent of Primary Residence. Normally, these two track pretty closely, but occasionally they deviate and last month OER was 0.2% higher than Primary Rents. That contributed to the very high median CPI in January, and there was a ton of discussion about whether the BLS had done something weird with the survey – they had, in January 2023, refined the OER weighting method and there was concern that this was a ‘mix’ problem that was going to continue to push OER higher than Primary Rents for a while. The BLS contributed to this sense of confusion by sending out a blast email which seemed to suggest it was so; they had to walk that back and to their credit did a very nice webinar and has spent a lot of time this month explaining in excruciating detail how the OER survey is conducted. Bottom line: there’s nothing to see here; sometimes the two series diverge slightly. Moreover, as I’ve pointed out previously, when natural gas prices are declining it tends to mean that the cost of imputed utilities is declining which, since they’re deducted from the rental survey used for OER means OER should be slightly higher than Primary Rents over time. Not 0.2% per month, though, and I expected this aberration would mostly close this month.
It did, with OER +0.44% m/m (was +0.56% last month) and Primary Rents +0.46% m/m (was +0.36% last month). Year over year, they’re about the same but OER has moved slightly above Primary.
So the surprising part to me was that Primary came up some to help close that gap, not that the gap closed. I continue to expect rents to decelerate, along with everyone else – only, as I will keep saying until I am blue in the face, we are not going to go into rent deflation as so many people have been forecasting (folks seem to be backing off that now!) but rather we should drop into the 2%-3% range y/y before rebounding later this year.
There seems to be evidence of that in the independent rent measures. Below is a chart from a recent Redfin news release. It bears noting, of course, that these rent measures also all went into deflation and misled all of those economists who lean on these high-frequency-but-low-quality data. (Having said that, Redfin does seem to be better than some others, but it’s still measuring something different than what the CPI is measuring).
Now, the story starts to become a little clearer, albeit concerning. Core services rose to 5.4% y/y from 5.2% y/y, while core goods was unchanged as I noted above. Rents are coming down, but outside of rents we are seeing some stabilization at higher-than-pre-COVID levels. The chart below shows Shelter CPI, and Core CPI ex-Shelter, which has been roughly stable for three months around 2.25%. That sounds great, since 2.25% on CPI is roughly equivalent to 2% on the Fed’s PCE target…except that 2.25% is higher than it was pre-COVID. The theme, and we’re seeing it in several places, is inflation being sticky at higher levels than it was pre-crisis.
There were some good parts to the report – notably Food, which was tame m/m for both Food at Home (-0.03% m/m versus +0.37% last month) and Food Away from Home (+0.10%, was +0.47%), although the latter is probably not sustainable given rapidly-rising wages. Still, it’s positive. Unless you’re buying baby food, which is +9.2% y/y!
Actually, babies got a lot more expensive this month. The largest increase in the categories used for Median CPI was Infant/Toddler Apparel. In general, apparel categories were right-tail items this month. But there were not enough of them to explain the high core CPI. Median was +0.39% (my estimate); since that’s right in line with core it says the tails weren’t what moved this number. It’s just that this month, inflation rose at something like a 4.25%-4.75% annualized pace.
With this, and with Core Services ex-shelter (“Supercore”) at +0.47% m/m – which means supercore accelerated to +4.3% y/y – it is inconceivable that the Fed will yet consider cutting rates. It is possible that they may later in the year, but there is far too much exuberance in the bond market about that prospect.
Indeed, there’s far too much exuberance generally. Stocks rose on an inflation report showing that inflation was higher than expected. I’m not saying that equities should crash on this data, but that’s the sort of reaction that you tend to see in bubbles. The market will be semi reserved going into an economic report, but then rallies afterwards regardless of the data. I have seen that sort of environment, where such a thing happened regularly, a couple of times in my career and they never ended well. To jump on this data, as if it was in any way positive, says that people were just waiting until after the number to buy, and they were going to buy no matter what. That’s not a healthy market, especially when that happens at high prices rather than low prices.
I continue to expect median inflation to decline to the high-3s, low-4s, maybe dipping a little lower than that in Q3 if rents bottom then as I expect. The bottom line is that we’re near levels where I have been expecting inflation to get sticky, and it seems to be happening. I didn’t see this particular month being sticky, but the general tenor of the data makes sense to me.
Understanding Biden’s Poll Numbers Despite a ‘Strong Economy’
The Biden team keeps talking about how they can’t believe how underwater the President’s poll numbers are, when the economy is so frickin’ good. “As soon as people figure out how frickin’ good it is, they’ll come running to vote for him.”
At some level, one can be sympathetic with that view. Inflation is down to only 3.1%, the Unemployment Rate is still sub 4% even with the most-recent rise, well below the levels when he took office; Average Earnings are up and gasoline prices are down around $3 after being above $5. What’s not to like? Moreover, put this record next to Trump’s record! When Trump came into office, Unemployment was 4.7% and when he left it was 6.7%!
The problem that the Biden team has – and, frankly, the one it has always had – is that they have no idea how actual people experience the economy, and no idea how actual people think.
Americans, on average, tend to be fair. When people think about the Trump years, they recognize that it isn’t quite fair to saddle him with COVID. While they don’t think this explicitly, their memories about the 2016-2020 period fall into “pre-COVID” and “post-COVID” zones. In other words, if in mid-March 2020 a particular consumer was positively disposed towards the Trump economy, then that’s what their memory is. When COVID hit, it started a new time period in their memory. So to the normal person, they remember Trump coming in with a 4.7% Unemployment Rate and watching as it fell to 3.5% in February 2020. “Then COVID hit.” This works against Trump in little ways too; no one gives him credit for the disinflation that happened between March 2020 and the end of his term.
So this is the way that normal people see Trump’s record:
Now, the best part of Biden’s record is that Unemployment fell from 6.7% when he took office to 3.7% as of January. Other than that, though, his record in the minds of Americans looks unimpressive. (Of note is – and folks, don’t shoot the messenger; I’m just showing the data – that the Biden team persistently claims that real earnings have risen during his Administration, while it isn’t so.)
And so now, let’s put them side by side. Inflation is higher under Biden, gasoline prices have risen under Biden, real earnings are down under Biden, and food costs are up (a lot) under Biden. The unemployment rate has fallen more, but is now higher than it was pre-COVID under Trump!
If you realize that Americans are not going to blame Trump for COVID, then it gets very easy to understand why Trump polls better on the economy.
