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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 (October 2024)
I said two months ago that I didn’t think the Fed should ease, but they would anyway. And they did, by cutting overnight rates 50bps. Then last month I said “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… 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.” And the Fed, on cue, cut rates 25bps.
But the Fed is getting into an uncomfortable position now, because inflation looks like it has leveled off. As I have said for a while it likely would.
We will get to that. First let’s look at the number.
The economists’ consensus has been drifting higher in recent days, as data on used cars was suggesting that component would be an add in October. Consensus going in was for +0.21% headline (SA) and +0.28% on core. The actual numbers were +0.24%/+0.28%, so pretty close to the consensus with y/y headline inflation at 2.58% and y/y core at 3.30%. It doesn’t seem to me, though, that the chart of core CPI for the last year is particularly soothing. More and more it appears that May-June-July were the outliers, and we are hanging out around 0.3% per month on core inflation.
Also, my early estimate for median inflation is 0.296% m/m, leaving y/y basically unchanged at 4.09%.
Used Cars was indeed high, at +2.7% m/m. But the real problem with Used Cars isn’t this month. The real problem is that for two and a half years Used Cars has provided steady disinflation as the COVID spike (caused because new cars were not being produced as quickly thanks to supply chain problems, but the deluge of money meant that people had lots to spend and wanted cars dammit) ebbed…but that game appears to be about over.
So if you want to get inflation lower from here, it’s going to be a challenge to get it from core goods, which was steady y/y at -1% this month but only because Apparel had a large decline. Core goods is likely to head back to small deflation or small inflation (with the dollar’s recent strength, small deflation is the better guess), but higher from here. We have known this for a while. The heavy lifting is going to have to come from shelter, or supercore, going forward.
So as for shelter…OER was +0.33% m/m in September but +0.40% m/m in October. Primary Rents were +0.28% last month and +0.30% this month. The y/y disinflation is continuing, but still no sign of the hard deflation we were promised.
The good news here for 2025 is that if Trump’s plan for mass deportations happens, and if “mass” means millions, then some of the pressure on shelter that developed over the last few years as ten million additional heads needed roofs over them will abate. Then maybe we can get shelter inflation lower. There is a modest additional “if” part, though, and that is “if landlord costs can stop increasing.” Our bottom-up landlord-cost-driven model has primary rents eventually converging just south of 4%. Better, but still not great.
So that leaves supercore, which unfortunately ticked higher this month.
The problem there also remains the same. Stop me if you’ve heard this one, but wages are moving only slowly downward, and supercore is where the wage/price feedback is the strongest. The red line below is Bloomberg’s calculation of supercore and the other line is the Atlanta Fed wage growth tracker. And the problem is that median wages don’t tend to move drastically differently than median inflation, which as we have discussed is proving sticky.
If core goods is no longer declining, and shelter isn’t doing the heavy lifting of deflation, and if core-services-ex-shelter (supercore) is leveling off…then gosh, that looks a lot like high-3s-low-4s village.
As an aside: I have been saying ‘high 3s, low 4s’ would be where inflation settles in…and I’ve been saying that for a couple of years. Even I am a little amazed that I haven’t had to tweak that forecast much, other than to allow that we might briefly dip below that if housing followed the dip-and-bounce that our model had. I don’t want to put on false humility, because I was saying that inflation would stay sticky and too high long before anyone else was saying that, and I had the correct reasons and I think I’ve guided readers and clients well. But getting the landing spot right, that far in advance, also clearly involved some luck. I am saying that partly to keep the Fates on my side. But you should also know that someday, it might turn out that ‘high 3s, low 4s’ needs to be adjusted. And I’ll still consider this a pretty good call!
The Fed’s actions can clearly affect that eventual equilibrium level, but it doesn’t look like they are yet taking this seriously. The game isn’t over and there will be more CPI reports and more after that. But for now, this looks like a policy error – or worse, a blatant attempt to influence the election – and unless something unexpected happens with prices it looks like the Fed is going to have to choose between the right policy move (which means continuing tight policy) that appears to be political, or continuing to loosen policy so as to not appear to be political, and temporarily surrendering on inflation. I suspect that the FOMC will vote to keep rates steady at the next meeting.
By the way, if you care about the crypto space at all and haven’t read my column on stablecoins, you should, and you should be sure to circulate it. The column is 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 (Apr 2024)
The CPI for April came in pretty close to expectations. CPI came in at 0.31% m/m, and 0.29% on core, versus a priori expectations for 0.37% and 0.30%. This relative accuracy does not necessarily mean that economists now know exactly what is going on in this index, only that all of the misses canceled out. But the misses are interesting, and worth looking at, and we will do that here. Ultimately, reports like this mostly create an opportunity for framing the debate on whichever side you are on. But to my mind, this report does not meaningfully move the ball towards ‘price stability’ and leaves the Fed – if they’re being honest – still in a bind between slowing growth and sticky inflation.
Not all parts of the CPI were sticky, and that’s the point here. Actually, that has been the point for quite a while, but it was very stark in today’s report. Here’s the distribution of y/y changes in bottom-level components in the CPI. Today, the left hand stuff got lefter, the right-hand stuff got a little righter, and the middle stuff stayed about the same.
I don’t usually lead with the distribution, but it is important to keep this in mind. Inflation is not, especially at lowish levels (say, less than 5-8%), a smooth process. I used to liken this to the process of popcorn popping in a bag; the bag inflates but not because all of the kernels popped at once. The good news is that the popping is slowing, as the Fed has removed some of the heat from the bag, but the pops are still happening.
Now, here’s the good news. Thanks to core CPI being on target, the 3-month, 6-month, 9-month (well, never mind that one), and 12-month averages all decelerated.
Median inflation won’t be out for a couple of hours, but my estimate this month is 0.348% m/m, essentially unchanged from last month. That’s sort of the bad news – the y/y median CPI should be stable this month at 4.5%.
So, I think the bold type for the top line is this: inflation is decelerating, but slowly, and in a sticky fashion. The markets loved that answer and stocks and bonds leapt on the report. But that’s all framing. The debate coming into today was never about whether inflation was declining – it has been, for a while, and is expected to (even by me, and I’m on the high side of Street expectations by a fair amount) until at least Q3 and probably into Q4. That wasn’t the question – we have known since the middle of last year that 2024 would see decelerating inflation. The question is whether the deceleration will continue after that, and whether it is decelerating to 3.75%-4.25% or 1.75%-2.25%. There is as yet no sign of the latter and all signs still point to the former, because the sticky stuff is not yet unstuck.
And that continues to boil down to this: deceleration is still being driven by core goods, and resistance to that deceleration by core services.
Core goods fell to -1.3% y/y this month. I have been saying that we’ve squeezed about all we can out of core goods, and then it drops from -0.7% to -1.3%, the lowest y/y figure in 20 years! This happened even though Apparel rose 1.2% m/m. As usual, the main culprits were autos with Used Cars -1.38% m/m after -1.11% last month, and New Cars -0.45% m/m. Ironically, I think the continued softness in autos is due partly to the continued rise in motor vehicle insurance costs (which were +1.4% m/m again). We hear a lot about the affordability of housing, but you gotta have housing. You don’t gotta update your car.
The softness in core goods is welcome, naturally, but that’s the volatile part of CPI. And such low levels are only sustainable if the dollar continues to strengthen.
On the other hand, core services only softened to 5.3% y/y from 5.4%. A lot of that is housing, with OER +0.42% m/m (was +0.44% last month) and Primary Rents slowing to 0.35% from 0.41%. But outside that, ‘super core’ (core services less rent of shelter) is actually still bouncing higher. It’s 4.91% y/y – below the 6.5% it got to in late 2022, but well above the lows from October (3.75%).
Some people will like the fact that the m/m Supercore was “only” 0.42% or so, which is down from recent months. But that’s a little deceiving. Airfares were -0.81% m/m, car/truck rental -4.6%, and the monthly health insurance bump has run its course and is back to a more normal m/m change (positive, but at a 3.5% annualized rate). Longer-term, we still have to worry about the continued acceleration in, say, hospital services, which is +7.7% y/y. I pointed this out last month, and the picture is no prettier this month.
One other comment/update on rents. It is proceeding according to expectations, although I expect a slightly faster rate of deceleration for the next quarter or so. But then, all the signs are that rents are going to re-accelerate. Even those terrible indicators that inflation dummies (this includes Yellen and most of the Fed) relied on to forecast that rents would be in deflation this year…even those indicators are showing a bounce to come. Home prices are accelerating again. And none of this is surprising given that landlords are facing higher costs and increasing demand (6 million immigrants need roofs). And this is why the inflation dummies are inflation dummies – there was never, never, a good argument for why rents should be in free fall, if you just spent 10 minutes talking to an actual landlord. Get your heads out of your models and look around occasionally, dummies.
Okay, so that was a little strident but I am getting a little tired of asking potential clients how they are addressing inflation and hearing them tell me about their economist. Inflation hedging ≠ economists. Come on, people.
Let’s take this around to what we care about, and that’s policy. The Administration is trying to help the inflation figures by delaying the refilling of the Strategic Petroleum Reserve if prices go up, but is also implementing new tariffs on Chinese goods. That answers the first WWJD question (what will Joe do) – in an election year, actions which cause inflation next year are fine…just not anything which causes inflation this year. The other WWJD question (what will Jerome do) is still interesting. Growth is indeed slowing, and has been slowing for some time. Consumers are looking a bit tired, and unemployment is rising slowly. But inflation is not behaving. Median inflation won’t get below 4% until September at the earliest, and even optimistically won’t get to 3% before it starts to bounce. Before, the Fed could pretend that the new rent indicators showing widespread deflation gave it some latitude to move before the rent decreases actually arrived, but that isn’t a plausible argument any more.
However, the FOMC has started to lean more dovish. The significant decrease in the rate of taper that was announced at the last meeting clearly shows which way they are leaning. The case for a rate cut later in the summer (absent some financial crack-up that needs to be addressed) would be based on the Committee members’ sense that the current policy rate is above neutral and can be moved back towards neutral as the risks become ‘more balanced.’ Additionally, doves could argue that they don’t want to be seen easing right before the election so an ease at the end of July is a ‘down payment’ on looser policy later. The inflation data don’t support that, but the Fed doesn’t care only about inflation data. If I was on the Committee, I would not vote to loosen the taper or lower rates, but I would not be surprised to see a token ease at the end-of-July meeting. It would be cavalier, and possibly political, and not supported by the data we currently have in hand…but it wouldn’t surprise me.
One final administrative notice to those of you who subscribe to the Quarterly Inflation Outlook. The Q2 issue is expected to be published this Sunday, so look for it! (And subscribe, if you haven’t).
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 (Jan 2024)
This is the reason that serious people don’t choose a trend length that happens to fit with their narrative. For the last few months, supposedly-serious economists have crowed about how the 3-month average of seasonally-adjusted CPI was at a new post-COVID low. (Most of those same economists, only a few months ago, were focused on the 6-month average, but when that started crawling higher they switched to the 3-month average.) And indeed, it was exciting. Headline CPI was down to 1.89% on a seasonally-adjusted-three-month-average; core CPI was at 3.30%. Victory over inflation was proclaimed! Inflation was back at target, even a bit below, so the Fed should start easing policy forthwith.
Fortunately, and maybe surprisingly, Chairman Powell is built of stronger stuff.
As a ‘Cliff’s Notes’ guide to what you’re going to read: all of those folks who loved the 3-month average when it was 1.89%, aren’t going to be as vocal about it now that it’s at 2.80%. Core, on a 3-month average basis, is at 3.92%. The 6-month averages also rose.
Now, this doesn’t mean that inflation is necessarily headed back higher yet. I’ll get to that in a bit, but I will allow as how the picture of m/m core CPI, below, might be perceived by some as discouraging.
Prior to this figure, consensus was for a fairly strong report, 0.16% on headline and 0.28% on core. I thought it would be softer, because rents on the basis of my model should start to decelerate soon. But, as I said in my podcast, if rents were high then you should look past rents. They’re going to decelerate over the next 6 months or so, to around 3% y/y, and then re-accelerate. That’s all baked in the cake, and it will flatter the inflation data. But it hasn’t happened yet! OER was a massive +0.56% m/m. Primary Rents were more in line with what I was looking for, with a small deceleration to +0.36% m/m from +0.39% last month. The indices are still decelerating…just not as rapidly as I think anyone (myself included now!) expected.
Lodging Away from Home was +1.78%, which was a big m/m figure and contributed to the overall housing subindex being +0.62% m/m at a time when shelter should be decelerating.
But as I said, if this surprise was all OER then we can look past it.
Core Goods was weak, which was a downside surprise. Used Cars fell -3.37% m/m, which is far worse than any surveys saw this month…but as I pointed out last month, Used Cars had been surprisingly strong compared to the private surveys so this is partly a make-up and it contributed to the weakness in Core Goods.
Medicinal Drugs was also weak, -0.54% m/m, and that’s also in Core Goods. Overall, Core Goods – which had shown some signs of life – dropped back to deflation y/y this month.
Going forward, I don’t think core goods will stay in deflation. Partly, that’s because supply chains are being stressed again due to drought in the Panama Canal and the effective shutting of the Red Sea to container traffic, but it’s also partly because there is continued interest in ‘nearshoring’ which will raise costs (after all, it was to lower costs that firms offshored stuff in the first place. And then there’s also this, for the medium term. To be sure, this level of growth in Personal Consumption in the past was consistent with mild deflation – but that was pre-nearshoring. The direction is what I’m interested in, but I also think that for a given amount of PCE growth, we will see more core goods inflation in the future.
So now we turn to the really interesting part of the report, and that’s core services ex-shelter. I’ve been saying for a while that this category was going to be a sticky wicket because wages are still rising at a 5% y/y pace. And indeed, the wicket is sticky. This month, airfares rose +1.4% (this may have been related to jet fuel tightness on the east coast), but also again we saw a continued acceleration to Hospital Services, which rose to the highest y/y rate (+6.7%) since 2011.
Overall, core services ex-shelter (so-called “Supercore”) rose +0.85% m/m, the biggest rise in a couple of years, and the y/y measure is in an upswing.
Overall, this report is deflating…pun absolutely, 100% intended…for those who thought that inflation is settling gently back to target and that the Fed therefore can lower interest rates back to where we have a God-Given Right to have them, 2% or so. Not so fast! Median, by the way, was also a scintillating +0.53% m/m, the highest since last February. Thanks to base effects, the y/y Median CPI was essentially flat, at 4.90% y/y.
Because of the deceleration in housing I expect, I continue to see Median slowing to the high-3s, low-4s over the middle of this year. But it is going to have a hard time getting lower than that. In the short-term, we have saucy performance from core services ex-shelter. In the short- and medium-term, core goods is going to get out of deflation (although I don’t expect it to rise very far). And then housing should re-accelerate, though not back to the old highs. In short, inflation is a long way from being beaten. I am sure that somehow, that’s bullish for stonks, but I can’t figure out why. (I hear the 3-month moving average of the last four months of CPI, dropping the highest month, looks good.)
Inflation Guy’s CPI Summary (Dec 2023)
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I’m changing the way I do the monthly CPI analysis. Doing it live for an audience was always stressful, especially with the inevitable data issues from time to time. Of course, as an inflation investor/trader I’ll still do it live; I just don’t have an audience. The nice part about doing it live was that the monthly report had a very similar structure to it with the same charts all of the time, and that will change. But it also means that I can lead with the important stuff sometimes, like this month. So I’m going to start today’s discussion of the slightly above-consensus CPI report (+0.31% on core, vs expectations for +0.25%) by saying the quiet part out loud:
Rents aren’t collapsing. They are decelerating, and they will continue to do so, but they are not going into deflation. Everyone today seems to be acting as if this is some huge shock, but it really isn’t. The only reason to ever have thought there would be rental deflation in an environment of housing shortage was that some of the high-frequency rent indices (which are not designed to be high-quality data; they’re data derived from a business that have been packaged as if it is high-quality data) suggested declines in rents, and an influential article – I talked about it in episode 74 of the Inflation Guy podcast – popularized the notion that you could get more information from the BLS by looking at less data. But the cost side has never improved for landlords – in fact, it keeps getting worse – so it was hard to see how there would be a general decline in rents. In some parts of the country, from which people are migrating away, e.g. perhaps inner cities, rents may fall. But those people have to go somewhere. Big migration means the housing stock is now all in the wrong places, and rents go up when there’s a shortage faster than they fall when there’s a glut.
Anyway, both my costs-based rents model above and my old rents model below suggest the same destination for rents – middle of this year or just afterwards, y/y rents should get to around 2-3%. That’s a lot lower than the current run rate for rents, of +0.47% m/m for OER and +0.42% for Primary rents this month, but it’s also far above what the general expectation has been for this large part of the consumption basket. Moreover, it appears that the longer-term pressures are for that part of inflation to scoop back higher, not lower.
So, today’s rents number was a little surprising, but not that surprising. Some are attributing the miss today to ‘just rents,’ as if it’s okay for the largest part of the CPI to have a trajectory that’s confounding many forecasts, but it wasn’t just rents. Median inflation was +0.42% m/m, keeping the y/y number above 5%. And three of the last four figures have been in that zone. Median should keep decelerating too, but it is not collapsing.
Now, I’ll note that Used Car prices were weird, again. They rose +0.49% m/m, when I (and most folks) had expected a decline. They’ve been a bit squirrelly for a while, with official inflation printing higher than the private surveys fairly persistently for 6-9 months. But on the other hand, airline fares have been persistently squirrelly lower compared to jet fuel, so these two things were ‘errors’ in the opposite direction. This month, airfares also rose, by about 1% m/m – but that was right about where it should have been given the change in fuel prices and not a surprise.
Now, the diffusion stuff is looking better, and supports the idea that median inflation will continue to decelerate.
Such a deceleration has been and continues to be my forecast. I expect median inflation to settle in the high 3%s, low 4%s, and be hard to push much below that. In the near-term, meaning maybe by early H2 of this year, we could get some numbers a little below that as the rent deceleration continues. But then the hook happens. It will be hard to get inflation below 3% for very long, especially if the Fed decides to stop shrinking its balance sheet and money supply growth recovers.
So the system is normalizing after COVID (and more relevantly, after the spastic and dramatic fiscal and monetary response to COVID). But normal is no longer sub-2%. Core services ex-shelter (so-called “supercore”) abstracts both from the deceleration in housing and the sharp drop in core goods, and it is hooking higher (this is partly because Health Insurance had been artificially depressing it and that effect is waning).
Supercore is unlikely to really plunge either. Wages remain robust. The Atlanta Fed just released its Wage Growth Tracker, at 5.2% for the fourth month in a row. The spread between median wages and median inflation, which had been stable around 1% for a long while, is heading back there (see chart). So again, we’re looking at something around 4% for median inflation unless wages start to decelerate…and there’s as yet no sign of that.
The bottom line is that while this number was only a little bit surprising, it was surprising for all the wrong reasons. There is nothing in this figure that suggests the Fed can comfortably abandon a tight-money policy and think about easing soon, and I don’t expect them to do so.
