Fed | E-piphany

Summary of My Post-CPI Tweets (February 2022)

March 10, 2022 Michael Ashton Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy. Or, sign up for email updates to my occasional articles here. Investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Get the Inflation Guy app in your app store! Check out the Inflation Guy podcast!

Well, here we go! It’s #CPI Day, which this month happens to fall on the day after an intraday 60-cent drop in gasoline futures. THAT will clear your sinuses!
Before the walkup, let me tell ya that I will be on @TDANetwork today with Nicole Petallides @Npetallides at 11:50ET. Tune in!
Also, when I am done with the tweets today I will post a summary at https://mikeashton.wordpress.com . Later it will be podcasted at http://inflationguy.podbean.com. And all of that also will be linked on the Inflation Guy mobile app. Now with those preliminaries…let’s dig in.
We will get fresh 40-year-record highs again today, with the consensus calling for 0.8% m/m on headline (7.9% y/y) and 0.5% m/m on core (6.4% y/y).
The last four m/m core inflation figures have been tightly clustered from +0.523% and +0.603%, so the forecast is not terribly adventurous. There have been a few calls for hitting 8% y/y today, but I think some of those are so people can say they called for 8%.
We will get there next month, so no hurry.
That tight cluster of recent prints is really the main thrust of the story. The distribution of monthly core inflation is no longer around 0.2% per month or a little less. It’s around 0.5%. Hopefully we can get that down to 0.4% or even 0.3% eventually. But we’re not there now.
I should say that’s the main thrust of the CONTINUING story. This month, we have other stories courtesy of Vladimir Putin.
But, as a reminder, this inflation debacle started LONG before Russia invaded Ukraine. And it was committed with a worse weapon than a gun: the printing press. You can hide from a gun. You can’t hide from the printing press.
The Russian invasion caused disruption in the supplies of many commodities and helped spike energy prices. But remember, these are commodities. As long as Russia sells to SOMEONE, the eventual effect on energy prices will be much less than the short-term effect.
We covered this before with Chinese purchases of soybeans. So if Russia is constrained to only sell energy to, say, China, then China needs to buy less from, say, Saudi Arabia. Which means the Saudis have more to sell to us, or whoever previously got it from Russia.
Commodities are pretty similar. Part of the definition. So it disrupts the flow, but gasoline doesn’t spoil (ok, sure, it spoils, but slowly). I’m much more worried about wheat. If you don’t plant wheat this spring in the Ukraine, there will be less wheat globally for the year.
Now, unlike raw gasoline, which we consume in its commodity form and so shows directly in the CPI, raw food commodities don’t take the same path. Your Cheerios have oats, but they also have a lot of packaging, transportation, advertising, and so on.
That said, these large and sustained increases in energy affect food inflation through transportation, packaging, fertilizer too. Add to the impact of the war on planted acreage and you have the ingredients for a SUSTAINED increase in food prices for a while.
We usually look past food and energy, and focus on core, because food and energy mean revert pretty quickly. They won’t, this time, as quickly and that’s part of why CPI is broadening. And it’s why even after the peak, inflation won’t automatically recede on base effects.
Also, if energy prices spike, there is no guarantee it will affect other products so much because producers can smooth through spikes. A spike in wheat need not impact wages. But SUSTAINED increases in prices seep into those other goods and services. And they have.
…about wages, which is another interesting and important story. The Atlanta Fed Wage Growth Tracker, for my money the best measure of overall wage pressure since it focuses on continuously-employed people, is up at a 5.1% y/y pace.
Wages by that measure have actually been tracking pretty well with Median CPI. The chart of Wages minus median CPI is weirdly stable given everything that is happening. Implication?

What that says is that far from “not engaging a wage-price spiral,” the labor force is actually being uber-efficient at getting their wages adjusted. On average, of course, and adjusting for median not core. Median is a better sense of the middle – not driven by used cars, e.g.!
Does all of the transparency, the “Indeed.coms” of the world, make it easier to have a wage-price spiral because workers adjust their wage demands more quickly with better information? I wonder.
Back to the market and today’s figure. Here are the market changes over the last month. Yes, 1-year inflation expectations are +150bps. 10-years are +45bps. 10-year real yields are -44bps. (No surprise, with real yields down, gold is +8% over that timeframe). This is dramatic.

Wanna know what scares me? This chart. Money supply growth is still at 12% y/y, which is bad. But see commercial bank credit? It’s ACCELERATING. Concerning. The Fed directly controls neither of these, when they don’t control the marginal reserve dollar.

Now, for the CPI today. Rents will continue to boom, and used cars may settle back slightly. There are some signs of that. But that’s the fireworks. But I am gonna watch pharmaceuticals, and food & energy, more than usual.
The real excitement there will be NEXT month – this is Feb’s number and the Ukraine invasion hadn’t happened yet. Whatever today’s figure shows, it will just be the jumping off point for the March spike.
The interbank market still has the peak headline CPI in March (March 2021 was +0.31 on core, but April was +0.86, so it will be hard to have a new high in core at least after March), but now it has that peak at 8.55%. Go ahead, gasp. It’s a gasp kind of number.
That’s it for the walkup. Look for weakness anywhere in the number – won’t be much of it, so relish what you find. We no longer need clues about whether inflation is coming. It’s here. We need to start finding clues about a deceleration beyond base effects. Haven’t seen any yet.

The economists nailed this one. 0.8% on the headline, 0.51% on core (6.42% y/y on core). Yes, all 40+ -year highs. And still pretty much in the zone. Trend core inflation is right around 6-7% at the moment.

As expected, used cars fell a little, -0.25% m/m. But y/y still rose, to 41.2%. Other of the “COVID Categories”: airfares +5.2% m/m, lodging away from home +2.2%, new cars/trucks +0.3%, motor vehicle insurance +1.8%, Car/truck rental +3.5%. Ouch all around.
(of course, since they’re covid categories, lots of people will want to strip out all of that).
Food & Beverage major category: +1% m/m, up to 7.62% y/y. That’s the largest y/y rise in that category of CPI since 1981.
Core Goods at 12.3% y/y. Core Services 4.4%.

Rents: OER was +0.45% and Primary Rents +0.57%. Both represent accelerations over last month. Y/Y is at 4.3% for OER and 4.2% for Primary.
Medical Care continues to be a conundrum. Overall, that category rose 0.17% m/m after +0.85% last month. Pharma was +0.4% and continues to be the strong one. Doctors’ Services fell again. And this month Hospital Services also fell. I don’t understand that at all.
Core inflation ex-housing was 7.60%. in March 2020 it was 1.49% and it fell to 0.33% in May 2020.
Apparel, +0.72%. Recreation +0.73% m/m. “Other” +1.06% m/m.
Within Food & Beverages: Food at home (8.2% of the CPI): +1.4% NSA m/m; +8.6% y/y. Food away from home: +0.4% m/m, +6.8% y/y. Alcoholic Beverages +0.9% m/m, +3.5% y/y.
Food at home AND food away from home both at 42-year highs.

drilling down, the ONLY categories of food and beverages that declined in price: Fresh Fish and Seafood, -0.70% m/m in NSA terms, Bananas, -0.10%, Lettuce -0.29%, Tomatoes -1.88%, uncooked beef steaks -0.19%, and Pork Chops -0.01%. Most of that was seasonal as y/y accelerated.
Early guess at Median CPI is +0.54% m/m, which is down only slightly from last month’s spike. That median is now looking like core is what tells you that this isn’t just one-off categories.

Incidentally, my median estimate might be low…the median categories look to be the regional housing OERs, which the Cleveland Fed seasonally adjusts separately. I’m more likely to be low the way the chips fell. Either way, Median at 4.60% is really disturbing.
Let’s do the four pieces charts. First, Food & Energy. Unlike prior spikes, this is going to roll over more slowly. The rate of change will mean-revert. But the food part I think will remain a positive inflation contributor for much longer than normal (prices will keep rising).

Core goods. Nothing much to say. This is beyond automobiles. Part of this is pass-through of energy prices (via freight, packaging), so it’s a non-core effect on core. Some are bottlenecks. None look to be easing in the near-term.

This chart, piece 3, is interesting because about a quarter of this is doctors’ and hospital services, which have been pretty tame so far. And yet, it’s almost at 4%.

Finally, Rent of Shelter. Almost at 5%. So actually, the core-services piece is holding down inflation now…not shelter. Remember that shelter is the big, slow piece. Some people are calling for OER at 7%. I don’t get that from my models. But still, it’s going higher.

…and rents are part of the wage-price feedback loop. (Remember that the dip in 2021 was largely artificial because of the eviction moratorium, and everyone knew it, which is why it didn’t change wage demands much).

Almost 80% of the consumption basket is inflating faster than 4%. About a third is inflating faster than 6%.

At least by one set of models, the OER rise may be cresting soon. I’m a little skeptical but that’s what the model says. However, it’s not going to turn around and drop, which means core inflation will be high for a while. Not just 2022.

So I said to look for evidence of deceleration. There’s not much. But there’s a LITTLE. The Enduring Investments Inflation Diffusion Index declined to 35 from 41. That’s not a lot, but it’s in the right direction.

So wrapping up: there’s no real sign of any ebbing of inflation pressures. In fact, there are some signs that food inflation will stay elevated for longer than the normal oscillation cycle. But we are closer to the end of the spike, anyway, than to the beginning.
Core inflation will likely peak next month, and headline inflation in the next couple of months. That’s good. But we’re not going to go back to 2%. Right now, the monthly prints point to an underlying core rate around 6%. I suspect we will end 2022 in the 5s, or high 4s.
If there’s any chance to get to the 3s in 2023, it would be because the Fed starts to shrink its balance sheet with some urgency. I see zero chance of that.
In fact, as I’ve long said – the Fed is not going to tighten at every meeting. They’ll have excuses to skip meetings and assess.
For example, although Russia/Ukraine has nothing to do with monetary policy, it took 50bps off the table for this month – we will get a 25bp cosmetic hike in rates – and probably means they skip next meeting. And then once inflation peaks they’ll want to see how fast it ebbs.
Don’t want to overtighten, you know. The net result is that inflation is getting embedded in our psyche and it will be very long until we get 2-3% core inflation on a regular basis.
That’s all for today. Thanks for tuning in. Catch me on @TDANetwork at 11:50ET and look for my tweet summary at https://mikeashton.wordpress.com . Curious what tools we’re working on in inflation? Stop by http://enduringinvestments.com . Subscribe to my podcast. https://inflationguy.podbean.com Etcetera!

Core inflation for the last 5 months has been in a tight range suggesting 6%-7% is the underlying trend rate; this started long before Russia invaded Ukraine. The invasion means that food inflation will take longer to ebb than it usually does, as not only are we getting pass-through from the extended period of high energy prices (affecting freight, packaging, and fertilizer) but we’re also seeing plantings in Ukraine likely to be disrupted. But it isn’t just food and energy, but everything across the board. A plurality of the consumption basket is inflating faster than 6%!

And this is seeping into wages, and quite quickly at that. Wages are actually adjusting to the level of unemployment more quickly than history would suggest they should be. Based on where unemployment was 9 months ago, the Atlanta Fed Wage Growth Tracker should be around 3.5%. Based on where unemployment is now, it should be around 5%. It’s already there.

I showed a chart earlier illustrating that wages are not trailing inflation in the way that we normally expect that they would. Workers, possibly because there’s been so much turnover thanks to COVID and possibly because of the transparency of wages these days, are getting wage adjustments that keep them about where they historically have been with respect to inflation. That’s remarkable, but also problematic if there is anything to the “wage-price-spiral” thought process.

But at the end of the day I still don’t think the Fed is willing to move fast and break things. In the classroom, the Taylor Rule says they are dramatically behind the curve and should be hiking rates. Of course, the classroom also says that they should do that by adjusting reserves, which they no longer do, so the textbook is clearly flexible. But in the real world, Fed moves do not happen on paper and they don’t just move prices and output. They also crack over-levered entities and cause financial distress in unexpected places that leads to other bad things. The Fed has “learned” this over the years and it’s one of many reasons that I don’t think we’re going to see 200bps of tightening. And probably not 100bps of tightening, in 2022. They will be cautious, measure-twice-cut-once, speak sagely and calmly in the press conferences, and hope to God that they haven’t really messed it all up.

They have.

Categories: CPI, Tweet Summary Tags: core cpi, core inflation, CPI, Fed

Anatomy of a Monetary Policy Error

March 7, 2022 Michael Ashton Leave a comment

Well, it isn’t as if no one warned that monetary policymakers were eventually going to get painted into a corner. Long before the Covid crisis, there were many voices warning that the Fed’s tendency to ease aggressively, but to find excuses to tighten slowly, would eventually get them into trouble. And here we are.

The Federal Reserve, prior to the Ukraine/Russia war, had started to talk hawkishly about raising interest rates; that talk, combined with 40-year highs in core inflation, persuaded Wall Street economists that the Fed would raise interest rates by more than 200bps this year.

That was never going to happen, even if Russia had not invaded Ukraine. Not since the early 1980s has there been a tightening cycle of at least 200bps over 10 months that also ended with the overnight rate above where the 10-year rate had been at the beginning of that period. So the calls for 200bps of tightening with the 10-year rate under 2% was always an incredibly aggressive call. Moreover, those cycles where it did happen occurred in an era when the Fed Chairman didn’t go in front of the cameras every meeting to explain why the Fed was ‘trying to increase unemployment’ – and, in fact, back in those days almost no one outside of the financial community paid much attention to the Fed at all. Plus financial leverage, ancient source of dramatic accidents, was much lower then. So my operating assumption has always been that the Fed would probably tighten about 3 times this year, pausing in between each hike…or maybe hiking 4 times and then easing once. Especially since the Fed no longer controls the marginal reserve dollar (there being copious excess reserves), the effect of monetary policy moves is less clear…and this also mitigates in favor of taking time to assess the effect of policy moves by watching the economy evolve. Ergo, this tightening cycle was always destined to be late and halting, and focused on interest rates rather than on money supply. Such a trajectory already qualifies as a ‘mistake’ when inflation is threatening 8%.

But now there’s even more room for error. Because the skyrocketing energy prices trigger another mistaken belief at the Fed, which enhances the desire to tighten even slower/later.

The Fed thinks that rapid energy price increases have this effect on the economy: rapid increases in energy prices tends to cause slow growth or recession as those increases consume discretionary income and leave less for non-energy purchases. And recession causes a decrease in pressure on other resources, such as labor. Which, in turn, leads to lower pressure on core inflation. Since energy prices are mean-reverting (at least, the rate of change is!), the central bank is “supposed” to ignore inflation that is caused by energy price increases, since if they tighten according to some Taylor-Rule-like dictum then they’ll tighten into a recession and increase the amplitude of the business cycle. Ergo, the Russian invasion of Ukraine means that the Fed should tighten less.

However, that’s not the way this works.

Rapid increases in energy prices do in fact tend to cause recession. But inflation is not caused by too little economic slack, and disinflation is not caused by too much slack. Inflation is caused by money growth, period, and M2 money growth is currently above 12%. It is true that an increase in energy prices would lead to a decline in non-energy discretionary spending, which would limit core inflation, if money growth was low. But if money growth is high, the increase in energy prices just rearranges the relative price changes because there is plenty of money to go around. It doesn’t change the overall impact of the rapid money growth. (Small caveat: a scary recession would increase the demand for precautionary cash balances, lowering money velocity…but people are already holding such precautionary balances so it’s hard to see how that could be a large effect from this level). Ergo, when the Fed slows down its tightening campaign because of the way they believe inflation works, and especially if they decide to not shrink the balance sheet – because “higher long-term rates would be bad in a recession” – they won’t have any real effect on growth but they’ll be accommodating a much higher level of inflation.

And just like that, you have it. The genesis of a really colossal monetary policy error. Get ready.

Categories: Causes of Inflation, Economy, Federal Reserve Tags: Fed, inflation

The Coming Peak in Inflation (and Why You Should Hold Off on the Party)

January 17, 2022 Michael Ashton 1 comment

Get ready for it: over the next month or two, the vast majority of stories on inflation – at least, in outlets that are friendly to bullish interests – will remark on the 40-year highs in inflation but append the following phrase:

“But economists expect inflation to moderate in the months ahead.”

This is meant to do two things, if you’re a PhD economist or a market observer with a BA in Art History (the difference in prognosticative ability between these two groups is remarkably slim). First, it is meant to be a soothing reminder that inflation is just a passing fad and nothing to worry about. Pay no attention to the man behind the curtain… Second, it is meant to demonstrate the powerful insights that the speaker commands. Look on my Works, ye Mighty, and despair!

But the contribution of this pronouncement is small. The reason that “inflation will moderate” in the months ahead is simply due to base effects. The table below shows the monthly CPI (seasonally adjusted, headline) prints from 2021, which will be “replaced” in the y/y figures over the next year. The numbers in red all represent inflation which, if annualized, would be 7.7% or higher.

Some of these high prints are driven by energy prices, which are historically mean-reverting, and some are also driven by spikes in “Covid categories” (most famously, used cars). And so most economists’ forecasts project a return to what the economist considers to be the “underlying run rate” of inflation. To illustrate this, look at the chart below. There are two lines. One, the blue line, represents what the y/y headline inflation rate would be each month if we simply naïvely replace every year-ago figure that is “dropping off” with 0.333%. Y/Y inflation is roughly flat for a couple of months since 0.33% is roughly what Jan and Feb 2021 saw; then it starts to fall sharply as we drop off 0.62%, 0.77%, 0.64%, and 0.90%. In fact, if we printed 0.333% on headline every month for the next year, Y/Y CPI would decline in every month except for two of the next 12.

The other line in the chart, in red, shows what is currently being priced in the market. You can see that not much more thought goes into market pricing than goes into economists’ forecasts!

Here’s the critical, salient point. Every forecast ends up showing this mean reversion because the usual way of doing projections naturally ignores unknown unknowns. From the top down, we have to choose something to replace last year’s number and the natural assumption is that the “top down” guess hasn’t moved terribly far from the prior guess (in the case of headline inflation, something like 2.0-2.5%; for 2022 maybe they’ll throw in 3.5% or 4% ebbing to 2%-2.5% in 2023). And from the bottom-up, we know what went up (for example, the spike in used car prices) and we also know that the rate of change of that item will eventually ebb. We’ve known that about used cars for a while. It hasn’t ebbed yet, confounding many, but it will. But do you know what else happened, the unknown unknown, that was not forecast back when everyone was thinking headline inflation would decline into the end of 2021? The acceleration in new car price inflation!

Indeed, one of the reasons that people thought that used car inflation would slow down and even that used car prices might decline is that used car prices were in some cases exceeding the prices of new cars, which is an obvious absurdity. But surprise! Due to “a chip shortage”, or the problem getting foam for seat cushions, or any one of a half-dozen other reasons – but perhaps also due to excessive government largesse – new car prices are now rising at 12% y/y. That was an unforecast “unknown unknown” early last year, and it is one reason that headline inflation ended the year at 7% rather than at 3%. Okay, so there was a “reason” for this surprise. But if you as an economist didn’t see that coming, what makes you think that you will see the next one…or that there won’t be a next one?

Rob Arnott used to make a similar point about corporate earnings. He pointed out that while the “extraordinary items” for any given company, which gets magically discounted when they report their “earnings before bad stuff,” may be a legitimate way to think about the profitability of that company going forward, for the stock market as a whole the amount of “extraordinary items” shouldn’t be discounted since someone is always having a surprise. It’s a surprise in the micro sense, but not in the macro sense. Surprises happen. Similarly, with inflation: we see economists decay away the surprises that have happened, while ignoring the possibility of other surprises.

If the distribution of those other surprises was random – some of them “inflationary” surprises and some of them “disinflationary” surprises, then this could make sense. The errors would be unbiased and so a forecast that ignores them would be less-volatile then reality, but not necessarily a bad “most-likely” guess. But in this case, the errors are likely to be on the high side because money growth remains around 12-13% per annum. Guessing that overall inflation is going to head back to 1.5%-2.5% over the next year or two is simply a bad guess. That it will decline from 7% is a high likelihood, but not exactly insightful.

There is a context in which this observation can be a useful contribution: by reminding the listener that when they see inflation decelerate in the months ahead, it doesn’t mean anything we don’t already know, a statement about the likelihood of declining year/year inflation can be helpful. This is the baseline forecast; only deviations from the expected path are worth reacting to.

And for my money, those deviations are more likely to be above the forecast curve than below it.

And Then There’s the Fed

By the way, if the most-recent inflation numbers were basically as-expected…and they were pretty much right on expectations…then why are Fed officials suddenly sounding more hawkish? An as-expected number shouldn’t change your views, unless your expectations were non-consensus. That seems unlikely when it comes to the flock of Econ PhDs who inhabit the Eccles Building.

I think the reason the Fed is sounding more hawkish isn’t because anything has changed recently – it hasn’t – but because they think we need to hear that hawkishness right now. It’s like a parent thinking that the kids “need” a stern talking-to. The kids, somehow, never think so.

As a Fed official, if you talk tough now you create several possible good outcomes. You might “re-anchor” inflation expectations by persuading investors and consumers that the Fed is determined to restrain inflation. It seems unlikely, given how often they talked in 2020 about having the tools to be able to prevent inflation – and then neither using the tools nor preventing inflation – that they’d get much mileage from that tack but it’s a free option. Or, you might be able to nudge market expectations in such a way that an actual hawkish turn won’t be as damaging as it historically has been. Or, to be cynical, one might think that a Fed speaker wants to get stern in front of the coming ‘base effects’ ebb, so that it looks to the gawkers in the cheap seats like they moved inflation by merely talking about it. And, in the worst case, you can back off the tough talk before you actually have to do anything.

I think there are a lot of reasons that the Fed is not going to be hawkish in any traditional sense; they’re not going to restrain money supply growth by shrinking the balance sheet and squeezing bank reserves (even if they wanted to, that margin is very far away), and they’re not going to raise interest rates in anything like the aggressiveness of a traditional tightening cycle – partly because they won’t be able to stomach the wealth effect of the market reaction to sharply higher discount rates, partly because sharply higher interest rates would cause big problems with the federal budget deficit going forward, and partly because they have convinced themselves that inflation is currently just ‘paying back’ a long period of being ‘too low’ (whatever that means). For now, expect them to aggressively and triumphantly forecast that “inflation will moderate in the months ahead.”

But you know the truth.

Categories: Uncategorized Tags: CPI, economy, Fed

Summary of My Post-CPI Tweets (December 2021)

January 12, 2022 Michael Ashton 2 comments

Welcome to the first #CPI Day of 2022 (although technically it’s really the last of 2021 since we’re releasing December #inflation figures). Exciting times, as headline inflation might sport a 7% handle and core inflation definitely will be well above 5% y/y.
The last three numbers have been so broad, so worrisome OUTSIDE of the “Covid Categories”, that even the Federal Reserve is saying the right things. Will they really hike rates 4 times this year? I’m skeptical but we will see.
Core CPI for October and November were 0.599% and 0.535% m/m, respectively…but most importantly, there wasn’t a clear outlier causing these jumps. Median inflation, which is unaffected by those tails, has had three straight months above 0.45% (5.4% annualized).
Not only the Fed, but also the market, is finally starting to listen a little. This chart shows the changes from 1 month ago for real rates, inflation expectations, and nominal rates. All higher from mid-December.

But the theme from economists over the next few months – brace for it – will be “But economists expect inflation to moderate in the months ahead.” You’ll see this everywhere.
That’s because after easy year-ago comps for the next 3 months, they get difficult in April-June. So, while core inflation should get to 6% in early Q2, the y/y numbers PROBABLY won’t get worse than that (in 2022).
So, mix that story with “see, the Fed is serious and inflation is already coming down” and you’ll get the touts for stonks going in full force. Don’t worry, be happy. Buy the stuff that Wall Street needs to sell. Etc.
And there IS some good news. For example, the rate of increase in overland truckload rates is declining. Still high, but declining. Since trucking goes into all kinds of goods, it’s often a leader of the rate of change (not always).

Similarly, some modest good news from global shipping rates, which are down from their highs although edging back up a little (chart shows east-west container rates).

but … Other than those big base effects in April/May/June, there’s not a lot of reason to think the m/m #inflation figures will drop down to 0.15-0.2 again.
Going forward there will be a peak…but won’t be as serious as you think. We can all imagine used cars fading eventually. But no one bothers to imagine what will go up. So if you forecast a reversion to the mean for the first and ignore the second, of COURSE you forecast a peak.
Example: what about insurance? President Biden’s latest plan is to force insurance companies to provide 8 free COVID tests per person per month. Ignore whether the tests exist, but … Who do you think pays for that? Insurance company? Nope. More policy error.
What about China re-shutting some parts of its economy due to Omicron? Remember, (as I wrote in February 2020): “COVID-19 in China is a Supply Shock to the World” https://inflationguy.blog/2020/02/25/covid-19-in-china-is-a-supply-shock-to-the-world/ This is not policy error, just bad luck. But bad luck happens.
Last month I said “This is not about the pandemic any longer; it is about policy response to the pandemic. It is almost entirely policy error.” I feel strongly about this. While there is tough talk on this from the Fed, let’s see if it’s followed by tough action.
I’m concerned about that, since the Fed is still getting the story wrong. Powell says higher labor costs are not driving inflation. Well – that’s because labor costs generally FOLLOW inflation. Labor pushes when they see their own cost of living going up. Not before.
And thanks to workers’ pricing power, wage increases should rise around another 1% y/y by Q3, based on the current unemployment rate (green). This is good news for workers, bad news for consumers. Wages don’t cause inflation but they DO give it momentum.

So inflation will peak around April, but core will ebb to maybe 4%, not 2%.
Back to today’s number. Consensus is 0.4%/0.5% headline/core for the month and 7.0%/5.4% y/y. The ‘inside market’ is really 0.46-0.52 on core. The interbank market has the headline figure reaching 7.03%.
But remember this is December, and there are lots of weird seasonals, so anything can happen.
We are still watching rents, which should remain solid for a while here. Catching up from the end of the eviction moratorium, but there’s still plenty of heat in the housing market generally. And amazingly, we’re still watching used cars.
Here’s a chart of the level of used car prices. Not exactly collapsing! I mean, wow! I don’t know anyone who thought we’d get another leg higher.

And even the rate of change is reaching new highs. So we will likely get another push in the CPI from used autos, and new cars as well since they’re a substitute.

But most important in today’s #CPI remains the breadth. That’s the main focus today. If we get 0.7% but it’s all used cars, that’s not nearly as significant as if we get 0.4% and there are no outliers at all. That has been the recent story and I expect it to continue.
Good luck! I will have a summary of all my tweets at https://mikeashton.wordpress.com sometime mid-morning and then I plan to put out an Inflation Guy podcast (https://inflationguy.podbean.com) sometime today. Like, click subscribe, all that.
Also look for the Inflation Guy app in your app store (once we get enough users we will probably do livestreams to those users, rather than on Twitter).
And finally, book your free place at the Institutional Fixed Income Virtual Summit on January 22nd. https://lnkd.in/dab2WfEP

Hey! I finished with the walk-up early. Still time to grab a coffee. Number in 7 minutes.

A bit higher than expected 0.5%/0.6% on core. Headline did get to 7%, core hit 5.5%. Bloomberg kinda slow-rolling the seasonally-adjusted core number so don’t know the 2nd digit yet.
OK, here we go. The seasonally-adjusted core number, m/m, was 0.5501. So it just BARELY squeaked out the 0.6%. Still, higher than expected but not drastically.

Jumping out at me is the 1.72% rise in Apparel prices m/m. Apparel is only 2.7% of the basket but has been in deflation for years, punctuated by occasional attempts at price increases. Right now Apparel is +5.8% y/y. Some of that is likely shipping b/c apparel isn’t made here.

Used Cars, true to form, +3.5% m/m after +2.5% last month. Y/Y up to 37.3%. New cars +1% m/m.
Overall, core goods and services continue to look…um…disturbing?

Here is core services by itself. 4% looks like the big level. However, it’s no longer the case that this inflation is all about goods. Ergo, it isn’t all about supply chain.

OK in the COVID categories, 1.18% m/m from lodging away from home; +2.72% m/m from airfares. Car and truck RENTAL though was -5.3% m/m. That’s only 0.13% of CPI though!
Rents: Primary rents +0.39%, 3.33% y/y. That’s slightly lower than the last couple of months but still pretty hot. Owners’ Equivalent Rent +0.40%, 3.79% y/y. Ditto – lower but still hot. 4.8% annualized from a third of core would make it hard to get core back to 2%!
Medical Care was +0.28% m/m. But Pharma (+0.01%), Doctors’ Services (-0.05%), and Hospital Services (+0.16%) were all lower. Which means it came from insurance.
Here is medical insurance, y/y. Up 1.6% m/m. Medical insurance is a residual in the CPI (not directly calculated), but this is where added costs to insurance companies is showing up.

So core inflation at 5.5% is still “the highest since 1991”, but starting next month it will probably be “the highest since 1982” since the 1991 high was 5.6%.
Vehicle insurance (-16.8% one-month change, annualized) and Car and Truck Rental (-48%) were the only core categories that fell more than 10% annualized.
Categories that ROSE >10% annualized: Jewelry/Watches (+59%),Used Cars/Trucks(+51%),Womens/Girls Apparel(+30%),Public Transport(+26%),Motor Vehicle Parts/Equip (+21%),Footwear(+20%),Lodging Away from Home(+15%),Household Furnishings(+14%),Mens/Boys Apparel(+14%),New Cars(12%)
I am afraid this also looks like we are going to have another 0.45% or so on Median inflation. Hard to tell b/c regional OERs are the median categories it looks like, so it might be as low as 0.38% but unlikely I think.
Core ex-housing is +6.4% y/y. It’s worth remembering that core is currently being pulled DOWN by rents.

Folks, grab the reins on the change in the CPI weightings. They are a totally normal biannual thing. The changes will be larger this time than normal because consumption patterns changed – but there’s no conspiracy. Consumption patterns DID change. That’s all that’s happening.
Stories remain approximately the same for the four-pieces charts. The first is Food & Energy – most volatile, and the best chance for dropping the y/y headline number. But still, pretty ugly and this likely affects wage negotiations as people pay more for food and gas!

Core goods – a chunk is new and used autos. And there is upward pressure from shipping and trucking rates. But those are ebbing a little. This will eventually come back to earth, on a rate of change basis, but that doesn’t mean the price LEVELS will decline.

Core services ex-rents. This is still looking a little perky although not breaking to new highs like a lot of the rest of the index. Medical Care is actually holding down inflation. But uptick in health insurance is concerning.

Rent of Shelter – totally expected if you’ve been watching housing. Still has more to go! Again, it’s going to be hard to get core CPI back to 2% while rents are running 4-5% or more.

Slight good news on distribution. The weight of the consumption basket that’s inflating more-slowly than 3% is back above 25%!

OK, one more chart and then a quick wrap-up. Remember later to check out the summary at https://mikeashton.wordpress.com and look for the podcast version of it at https://inflationguy.podbean.com
I said the most important part of this report was the breadth. And it was again a very broad report; Median CPI will again be around 0.4%-0.5%. The Enduring Investments Inflation Diffusion Index reached a modest new high.

There is nothing in today’s number that suggests the underlying inflation pressures are ebbing. The y/y change will eventually come down because the comps will get more difficult, but there is NO SIGN that core will be dropping back to 2%.
My base case is that we end 2022 with something like a 4% core inflation rate. Could be as low as 3.5%, but the potential miss on the upside is larger than that.
The Fed is talking tough, but talk is cheap. They’re still easing at this hour! Eventually they’ll stop digging the hole. When will they start filling it in – not by raising rates which has small effect if any on inflation, but by selling bonds? Don’t hold your breath.
I think they’ll raise rates once or twice, maybe even thrice if bond and stock markets don’t seem to mind. But eventually, they’ll mind because discount rates matter. When that happens, I can’t imagine the Fed keeps sticking the knife in.
We have Volcker-like inflation, but we have no Volcker.
And that’s the problem. Thanks for tuning in! If you’re curious about what we do at Enduring Investments, come by http://enduringinvestments.com and say hi. I do these tweet storms for many reasons – but some of those reasons are commercial! See you soon.

This was, sadly, not a very surprising report. Inflationary pressures remain broad and deep, and the Fed today is still purchasing bonds and adding more reserves to the system. The FOMC is in a bit of a pickle since they labored so long under the false “inflation is transitory” story. The fact that they couldn’t foresee that the natural consequence of massive fiscal stimulus financed by massive monetary stimulus would be inflation is mind-boggling, but it does seem that they really did think that inflation was transitory and caused by supply-chain issues. Amazing.

So now, they’re behind the curve and really need to catch up and get ahead of this process. The inflation mindset is becoming entrenched (and I think already has), and all the Fed can do is talk about how they’re going to be gradual, gradual, a few hikes this year; maybe they’ll eventually think about shrinking the balance sheet; please don’t panic please don’t panic please don’t panic. But the slower the Fed goes, the harder they’ll have to squeeze liquidity to get inflation out of the system. And that will break a few eggs.

Volcker was not afraid to break some eggs. He saw that it was better to break eggs now than to be unable to afford eggs tomorrow. I do not currently see anyone at the Federal Reserve, or in central banking circles generally, made of that stern stuff. Ask me what inflation this year will be and I will say 4-5% on core. Ask me what it will be next year and I’ll say, probably about the same. Ask me what inflation will be in 2025 and I will say…

Do you have a Volcker? Because if not, we’re Volcked.

Categories: CPI, Federal Reserve, Tweet Summary, Wages Tags: core cpi, Fed, inflation

Summary of My Post-CPI Tweets (October 2021)

November 10, 2021 Michael Ashton 1 comment

Hello #CPI Day. Is it my imagination or do these keep getting better? Today we should see a 31-year high in headline inflation and the second-highest Core #inflation in 30 years. And, honestly, there’s a chance we break June’s high on core.
It actually doesn’t matter much if we move to 30-year highs on core this month because it will certainly happen over the next few. We are entering the easy-comparison part of the year. Oct ’20 through Feb ’21 had a CUMULATIVE 0.42% on core CPI.
And it isn’t just core. Last month, the theme of broadening price pressures took a big step forward as MEDIAN CPI had the largest m/m jump since 1990.
A lot of that has to do with rents, which are starting now to catch up after the lifting of the eviction moratorium. As expected. There is a lot more to go on rents.
So the underlying themes this month are the same as they have been recently: broadening pressures and less attention on the one-off COVID categories…although…
There will be plenty of volatile noise – that’s not going away soon, and it will contribute to inflation expectations since people encode price volatility as increase. Food inflation will probably be the highest in a decade.
Wholesale gasoline has risen 10 months in a row. Hey, how long has Biden been President, roughly? I mean, counting his naps? (Sorry, that’s piling on and a 15-yard penalty.)
Used cars (and new cars) are also a risk this month. Last couple of months, used cars were a drag as the spike was fading. Not so much. Private surveys are spiking again. We probably see that this month, “a chunky amount”. Here is the Black Book survey.

And here is the change, vs the CPI for used cars, lagged. You never know about the lags though.

Now, policymakers are expressing the opinion that the very high inflation numbers we are seeing now will fade later in 2022. They’re right. There are some signs here and there that certain bottlenecks are easing.
The inflation noise is going to gradually lessen. Unfortunately that means we’re seeing more of the SIGNAL, which remains strong. Pressures OUTSIDE of the ‘reopening categories’ are broad. So core inflation will stay high (just not THIS high, probably) through 2022.
And as shortages get resolved, they’ll likely resolve at HIGHER prices, not lower. See my article “Shortages are Unmeasured Inflation.”
& the causal elements remain. The Fed is tapering but credit growth has been hot.The idea banks are being stingy w/ credit is either false, or they’re being replaced by non-banks. M2 growth is down to ~13%, but that’s still WAY too fast. Especially as velocity recovers.
Onto this month’s report: the Street is expecting a soft +0.4% on core, which would be the highest since June. I kinda think that’s the best case unless OER and Rents abruptly slow down again. Last month’s 0.24% on core only happened because the one-offs pulled it DOWN.
The interbank inflation derivatives market has y/y headline hitting 5.94% today, breaking to 6.5% next month, and staying over 6% until April. (Some of that is due to base effects in energy and core.)
I expect Rents to continue to move higher. Looking for that, & watching Median CPI. It’s at 2.42% y/y and will be higher this month; will be over 3% before very long. That’s where I think everything ends up settling out, late in 2022: 3.5%ish. Not as bad as now…but not good!
Good luck this morning. I will have a summary of all my tweets at https://mikeashton.wordpress.com sometime mid-morning and then I plan to put out an Inflation Guy podcast (https://inflationguy.podbean.com ) sometime today. And let me take a moment this month to say: Thank you Veterans.

Welp. Golly. 0.60% m/m on core CPI, putting the y/y up to 4.58%. A new 30-year high! And easy comparisons still to come…

So let’s see. Used cars +2.5% m/m, which we sort of expected. OER +0.44% m/m, and Primary Rents +0.42%, which we sort of expected.
Apparel? 0.00% m/m. Which means all the other 7 major subcategories contributed. Recreation +0.69%. Medical Care +0.50%. Housing +0.72%. Food/Bev 0.84%. Other +0.85%. Educ/Communication only +0.16%. Transportation +2.37%. Broad.
Airfares: -0.66% m/m. But lodging away from home +1.35%. If you consider used cars a covid category (I don’t), then covid still net adding to this number. But then, everything was.
New cars +1.36% m/m after +1.30% last month. Used car prices can’t be above new car prices for long – but one way to resolve that is new car prices up, not just used car prices down.
Car and truck rental +3.1% after -2.9%.
In Medical Care, “Medicinal Drugs” +0.59% m/m. It is still down y/y, but is this a sign up upward pressure in a category that has been soft for a while?
Doctors’ Services flat, but Hospital Services +0.45% m/m, up to 4.04% y/y. I wonder if laying off lots of unvaccinated nurses will lower prices for health care? Hmmm. Guessing no.
Overall Core Goods rose back up to 8.4%. But more disturbing is core Services jumping to 3.2%. Again, a lot of that is in rents.
Food prices y/y up at 5.33%.
Oh my. Oh my oh my. My first guess at median CPI is +0.57% m/m. That would EASILY be the highest since 1982 if I’m right.
The really scary thing is that I’m looking for a big outlier. And I can’t really find one.
Postage and delivery services were up +3.87% m/m. But that’s 0.11% of the CPI. Cigarettes +2.08%, but that’s 0.53% of the CPI. Health Insurance +1.99%, and that’s 1.2% of the CPI. Airline Fares, +3.5%, but 0.6% of the CPI.
The only category that declined more than 10% annualized was Jewelry and Watches (-26% annualized m/m). There were 19 that ROSE more than 10% annualized.
Core CPI ex-shelter back up to 5.35%. Sure, a lot of that is autos. But you kinda want that to go down especially when shelter itself…
OER is catching up to the model…but the model is running away from it too.

Here are the four-pieces. Piece 1, food and energy. Highest since just before the GFC.

Piece 2 – Core goods. Near the highest since 1981 (only the bump in June was higher).

Piece 3: Core services less rent of shelter. At last! Something that isn’t near 30-40 year highs. But these are the slower-moving pieces. Maybe it’s because they haven’t had time yet to adjust…

Piece 4. Rent of Shelter. The part everyone was hoping wouldn’t follow home prices and asking rents. Sorry about that. It’ll shortly be at 30-year highs too.

So this is starting to be less-subtle. Last month’s distribution of y/y changes vs this month (“OCT”). Left tail vanishing. Right tail growing. And whole middle shifting to the right. Not subtle. Not isolated.

Here is the weighting of components of CPI that is inflating faster than 4% y/y. Almost 40% of the entire basket.

10y breakevens +5bps on the day to 2.69%. But that’s okay, Secretary Yellen tells us there’s no way that inflation expectations get unanchored.
I suppose it should be no surprise that the Enduring Investments Inflation Diffusion Index has reached an all-time high.

OK, let’s sum up. Different month, same story. There is still noise associated with “shutdown categories” and specific bottlenecks. But the underlying “signal” of inflation is getting stronger, as the pressures get broader. You can’t blame all of this on Long Beach.
Those pressures don’t come from the bottlenecks and shortages. They come from the fact that people can afford to pay higher prices because there’s more money in the system. Here is a chart of personal income vs GDP. Demand and supply. Where did the difference come from???

This ain’t rocket science. If you want the fire to stop, remove the oxygen. Oh, wait, actually that IS rocket science. Like, actual rocket science.
The Fed is finally slowing the rapid increase of its balance sheet. Be still my heart. Honestly, I don’t think they’ll even finish the taper, much less start to raise rates. Especially under Brainard. So buckle up. Lock in long-term contract prices.
I need to go take a shower. As much as the trajectory of inflation makes it fun to be “Inflation Guy,” this is monetary malpractice and it’s disgusting. This didn’t have to happen. Sorry. That probably shouldn’t be tweeted.
Anyway – the beatings will continue until morale improves!
Thanks for tuning in. There will be a tweet summary on https://mikeashton.wordpress.com in a little while.And I’ll drop a podcast later today. Interested in the new strategy we’ve launched, or want to work with us to launch one for your clients? Go to https://enduringinvestments.com & contact us.

Seriously, this month’s report – while expected, at some level – turns my stomach. We have learned these lessons, painfully, long ago: you can’t spend in an out-of-control fashion and you can’t print the money that you’re spending. That’s fiscal policy 101 and monetary policy 101. Flunk them all, I say.

The good news is that we no longer need to argue about whether or not inflation is coming. It’s here. We don’t need to argue about whether inflation will broaden beyond the re-opening categories. It has. The only questions are: how much? For how long? And how do we stop it? The third question we already know the answer to: restrain money growth; even shrink the money supply if velocity continues to rebound. No, that’s not against the rules. But it is against current monetary orthodoxy, which regards no particularly interesting role for the quantity of money. Flunk them all, I say.

The answers to the first two questions, how much and for how long, depend on how long it takes for policymakers to change course. On the fiscal side, there seems to be growing resistance to the idea that you can spend any amount of money because you can always print a trillion-dollar coin. But there are still some who profess to believe that if you spend more, you can solve bottlenecks by improving infrastructure. Maybe, if this was about infrastructure. But it’s not. It about spending in an out-of-control fashion and printing the money that you’re spending. On the monetary side, our choices seem to be another ride with Chairman Powell – who is the one who brung us to this party and I don’t really want to dance with him – or Lael Brainard, who thinks Powell has been too hawkish.

Do you see the problem?

Categories: Causes of Inflation, CPI, Federal Reserve, Tweet Summary Tags: core cpi, core inflation, CPI, Fed, inflation

Summary of My Post-CPI Tweets (September 2021)

October 13, 2021 Michael Ashton 2 comments

Here we are, #CPI Day again – where did that month go!? – And everyone is gathered around for the number. So many interested people! So many experts on inflation suddenly!
Last night, @TuckerCarlson led his show with a monologue re inflation. And he got it basically right, which is unusual for nonfinancial media. But the point is, “transitory” inflation is now important enough to get the lead on one of the biggest cable opinion shows in the world.
Which of course is why there are so many experts suddenly. Demand creates its own supply. But I am not complaining. There’s only one Inflation Guy and he has his own podcast https://inflationguy.podbean.com and app (in your app/play store)! [Editor’s Note: See the last bullet]
More importantly some regional Fed folks are starting to sound queasy. Atlanta Fed’s Bostic and St. Louis Fed President Bullard. The NY Times! The Wall Street Journal! The Poughkeepsie News-Gazette! Made up that last one but it’s everywhere.
Not the Chairman though, and not the Treasury Secretary, both of whom want the same thing: more money. Who was it? In the Volunteers with Tom Hanks I think: Mo money means mo power.
Meanwhile 1y and 3y expectations in the Consumer Expectations Survey are at all time highs since the inception of the survey in 2013. Which of course is why Carlson is leading with it. Consumers are noticing.
Are they only noticing because of used cars? Seems unlikely. They’re noticing broader pressures, which we are starting to see and still will be watching for in this report.
Speaking of used cars…while the rate of change might come down on some of these spikes, there’s no sign the LEVEL is retracing. See latest Black Book survey. “Holding steady” around 30% y/y. But that’s down from 50% in May.

Consumers are also noticing shortages, which is unmeasured inflation. If you put a price cap below equilibrium, you get shortages. And if you get shortages, you can presume the equilibrium price is higher. Repeat: Shortages are Unmeasured Inflation
Now, there’s good news. Delays at China ports are down. Although some of this is seasonal and some is due to the fact that…all the ships are sitting in OUR ports. But there is SOME good news anyway. Had to search for it.
Question going forward is how much of the pressure on suppliers gets passed through. It will be more (a) the longer it lasts, and (b) the more suppliers see others passing along costs. And profit season is about to start, where we will hear some of those answers.
In this CPI report today: the Street is expecting a very tame +0.2% on core, after a soft +0.1% last month. That seems very, very optimistic to me. If we get +0.27%, the y/y core rate will uptick to 4.1%.
And AFTER this, the comps are terribly easy so core inflation will be moving higher almost certainly for the next 5 months. The total for those 5 months in 2020 was +0.43% on core. The TOTAL.
So, core will be moving back towards 5%, even if the monthly figures settle in only at 0.2% per month. I’m not very optimistic that’s going to happen. But the Street is!!
We will be watching the usual ‘reopening’ items of course, but also watching RENTS and the breadth of this figure. And let’s not ignore food although not in the core – it’s one thing that consumers notice more than other things when it’s persistent.
I expect Rents to continue to move higher. So looking for that. And watching Median CPI, which set a new multi-year high month/month last month. It’s at 2.42% y/y and will be higher this month.
I’d also look at some of the “re-closing” categories that dragged down core CPI last month to reverse. Again, not a lot of sign that most prices are declining, even if rates of change are slowing.
Good luck out there. 5 minutes to the figure.

The economists nailed it! Well, mostly. Core was +0.24%, so at the upper end of the forecast range before rounding up. Y/Y went to 4.04%, also just barely not rounded up. But been a while since we were worried about rounding. Let’s look at the breakdown though.

Airfares plunged again, another -6.4% m/m. That’s going to change soon if vaccine mandates provoke more labor shortages there. But it does appear, from my own anecdotal observation, that airfares have been actually declining.
Lodging Away from Home -0.56% m/m. Used cars -0.7% m/m. Car and Truck rental -2.9% m/m. So, most of the “reopening” categories are still dragging this month, what I’d thought was a one-off. I didn’t think they’d top-ticked the prices before.
But New cars and trucks were +1.30% m/m after 1.22% the month before. As I’ve said before, the New/Used gap that closed when Used car prices spiked can open again in two ways. Used car prices can decline (no sign of that) or New car prices can rise.
Now, that was your good news for the day.
Primary Rents were +0.45% m/m, boosting y/y to 2.43%. OER was +0.43% m/m, boosting y/y to 2.90%. Whoopsie. Totally expected. And yet, kept seeing how the eviction moratorium wasn’t really holding down rents. Hmmm.
Medical Care, though, remains a soft spot for reasons that I just can’t fathom. Flat m/m. Pharmaceuticals rebounded to be +0.28% this month, but Doctors’ Services fell -0.30% and Hospital Services followed a strong month with a tepid +0.11%.
Apparel also plunged this month, -1.12% m/m. Small category, big move. Still 3.4% y/y, which is big for clothing, but it’s weird. With ports backed up, I’ve been seeing stock-outs in a lot of sizes of the stuff I buy. Shortages are unmeasured inflation. But still.
Quick look at 10y breakevens has them +3bps since before the number. The rents spike has people spooked. And it should. That’s the steadiest component. All of these large moves in little categories tend to mean-revert.
Core goods decelerates to +7.3% y/y (yayy!). But core services accelerates to 2.9% y/y (boooo!).

Core CPI ex-shelter dropped to 4.66% from 4.79%. So that’s the effect of all of these small categories. Meanwhile, rents boomed. And core-ex-rent at 4.66% isn’t exactly soothing.
Chart of core ex-shelter, and shelter. In the middle, you get core at 4%. If you want core to get back to 2%, you need core-ex to really plunge because shelter isn’t about to reverse lower.

Speaking of shelter, I hate to say I told you so but…and we have a long way to go.

Now let’s look at tuitions. Since we are in the Sept/Oct period, we’re going to find the new level of tuitions, which will be smoothed out over the next year with seasonals. This month, the NSA jumped 0.56%, and the y/y rose to 1.73% from 1.20%.
Tuitions aren’t going to jump a ton this year, but in 2022 I expect them to take a bump – partly to reclaim colleges’ purchasing power and partly because the product will be better next year.
Sorry, error. That was for the Education and Communication broad category. College Tuition and fees rose 0.96% m/m (NSA), and to 1.72% y/y from 0.83% y/y. Sorry.
Other goods. Appliances +1.55% m/m. Furniture and Bedding +2.35% m/m. Motor vehicle parts and equipment +0.85% m/m. Medical equipment and supplies +0.96% m/m. So doctors? Not so much. EKG machine? Syringe? Give me your credit card.
Breakevens dropping back. That’s profit-taking on the pop. They’re going to keep going up I think.

Biggest core m/m declines annualized: Public Transportation (-46%), Car/Truck Rental (-30%), Womens/Girls Apparel (-28%), Jewelry & Watches (-18%), Misc Personal Goods (-13%).
Biggest core annualized m/m increases: Motor Vehicle Insurance (+28%), New Vehicles (+17%), Household Furnishings/Ops (+13%), Motor Vehicle Parts/Equip (+11%), Infants’/Toddlers’ Apparel (+11%).
I said pay attention to food, which is what people notice. Overall Food & Beverages was +0.87% m/m. Some big movers: Meats Poultry Fish Eggs (+29% annualized), Other food @ home (15%), Cereals/baking products (13%).
Oh my. Median. My early estimate, which I hope is wrong, is +0.45% m/m. If I’m right that would be the highest in 30 years. On MEDIAN. Not meaningfully higher than that m/m since 1982.

If that’s right, the y/y would be 2.78%. Still short of the 2019 highs, but not for long.
That median calculation tells me I need to look at the diffusion and distribution charts. Which will take a couple of minutes to calculate. Please hold.

While we are waiting for the diffusion stuff, here are the four-pieces charts.
Piece 1: Food & Energy. The most volatile, but recently it’s just been up. And this is the part that people notice. Normally ignored because it mean-reverts. But it’s hard to get near-term bearish on energy or food, especially as the latter involves lots of pkging and transport.

Core goods. Coming off the boil because of Used Cars. Staying as high as it is because of New Cars and other durables. Sort of concerning it isn’t dropping faster.

Core services less rent of shelter. The one encouraging piece although it relies heavily on medical. Service providers not yet passing through wage increases so much. This is where the spiral would really happen, if it did.

Piece 4, and the news of the day. Rent of Shelter is now shooting higher, after being held down by the eviction moratorium and lack of mobility. This will set multi-decade highs over the next year, and as the slowest piece makes “transitory” much harder to believe.

The Enduring Investments Inflation Diffusion Index. Not that you need this chart to convince you, but price pressures are the broadest in about 15 years. And getting broader, fast.

So, here is the distribution of y/y price changes by base component weights. Note two things: (1) there is a long right tail, which is symptomatic of inflationary periods. Core above median. (2) The whole middle has shifted higher. This is of course largely rents.

So…we are getting higher inflation from the slow-moving pieces, and higher inflation from the fast-moving pieces. What’s not to like.
And finally, here is a chart of the weight of all components that have y/y inflation above the Fed’s target (which equates to about 2.25% on CPI, roughly). Highest in a long time. Only 1 in 5 purchase dollars is going to something inflating less than the Fed’s target.

So in sum…the overall 0.2% on core, which was nearly 0.3%, was the best news of the day. There is nothing in the details, distributions, or trends to make you think this is about to end.
Because of comps, we can be confident that y/y core and median inflation are going to accelerate for at least the next 5 months. And there’s nothing to convince me that the monthlies are going to stay nice and tame.
Transitory is dead. There is too much liquidity. The Fed now needs to choose whether to drain liquidity (not just taper), and live with much lower asset prices, or keep pumping asset prices “for the rich,” while we all ultimately lose in real purchasing power.
Powell is over a barrel, but to be fair he was also the cooper.
FWIW, I think the taper will happen. It will stop when one of two things happens: (1) Brainard replaces Powell or (2) Stock prices decline 15%. The Fed is fighting a war and they don’t even know it yet. They are working to keep the bread and circuses flowing.
That’s all for today. I will have the summary post up on http://mikeashton.wordpress.com in an hour or less. Visit our website https://enduringinvestments.com ! Get the Inflation Guy app. Check out the podcast “Cents and Sensibility.” And stay safe out there.
Biden to meet with ports, labor on supply chain bottlenecks
I mean, this will definitely help, right? “Mister President, since you asked, we’ll clean it up.”

Biden to meet with ports, labor on supply chain bottlenecks

Just heard that the Inflation Guy app has been “temporarily” pulled from the Google Play store. Uh-huh. Totally normal. Waiting for the notice from Twitter that I’ve been kicked off for “spreading disinformation.”

One of the ways you can tell this is getting bad is that the people who told us this was all transitory, had nothing to do with money, and would be over soon are doing one or more things from this list:

Pretending they never said it.
Pretending they didn’t mean what they obviously meant.
Getting angry because they were wrong and you were right.
Accuse you of also being wrong because you didn’t specifically say Used Cars was going up.
Trying to talk over, or squelch, the people who are bearing the bad news.

Last month, we had an 0.1% on core. But when you looked at the details, it wasn’t really soothing because it was being held down by the “COVID categories” which were falling again. You didn’t really have to squint, but you had to look below the headline. This month, we almost printed an 0.3% on core, and that was only because of those same categories (plus apparel), for the most part. You didn’t need to look hard to see the problem. Primary rents had their biggest m/m jump since 1999. OER, the biggest jump since the heart of the housing bubble in 2006. Those are big pieces, and we have a great deal of confidence that they are going to continue to rock-n-roll. After all, we have long said that rents were being restrained mainly by the eviction moratorium and would begin to normalize after the moratorium was lifted. Quod erat demonstrandum.

The trajectory of inflation is becoming clearer. The debate is no longer whether inflation is going up but how high it will get and when the peak will happen. That’s the right debate. The ancillary debate is whether the next ebb will be at 2% or something higher, like 3%. Some outliers still see the next ebb as serious deflation, but those are the same people who thought we wouldn’t see inflation when the Fed started printing money that the Treasury spent. [Note to the purists: yes, the Fed doesn’t “print” money, but it’s silly to argue that buying bonds for reserves isn’t equivalent ‘because it’s an asset swap.’ That’s just sophistry. It’s also an asset swap when I buy a refrigerator for cash, but circumstances have clearly changed for both buyer and seller when I do so. Anyway, go sell your crazy somewhere else. We’re all stocked up here.]

There is at least a sliver of good in this mess, and that’s that while investors in the main totally blew the chance to buy cheap inflation protection before this all happened (because they believed inflation was not a risk), and totally forgot that inflation affects not only asset prices but stock and bond correlations, they are re-learning these lessons from the 1970s and 1980s. And so investing hygiene will be better going forward. We have more tools to hedge inflation now than we did in the 1970s, and failing to use those tools in a healthy investment portfolio will no longer be acceptable.

And I know I don’t need to say it, but my company Enduring Investments is here to help those investors. Just like all of those other experts, except we’ve been here for longer.

Categories: Causes of Inflation, CPI, Tweet Summary, Uncategorized Tags: core inflation, CPI, economy, Fed, inflation

CPI Forwards Show Inflation Concerns Aren’t Ebbing

August 9, 2021 Michael Ashton 1 comment

One of the most important things I learned as a markets person was the relationship between “spot” prices and “forward” prices. A spot price is the price today, if you buy a particular investment or commodity. A forward price is the price that you agree today to pay in the future on some date for delivery of that investment/item.

To a non-markets person, this seems odd. If I want to buy a carton of milk, but the grocery store is out of milk so I tell the grocer “hold one of those cartons for me when they come in,” it wouldn’t occur to me that I should pay a different price than is on the shelf. Or, maybe, I might expect to pay whatever the price is, when the milk comes in. But I wouldn’t think that today I should arrange for a different price for that milk just because I get it in the future.

But of course, the idea of the present value of money is super important in investing. A dollar received in the future is worth less than a dollar received today. (That is, unless interest rates are negative. In that case, a dollar in the future is weirdly worth more than a dollar today, and we are in that bizarre situation I described once, in a really neat post, as ‘Wimpy’s World.’) But it isn’t just money that has a different value for future delivery than it does today. There are at least two ways that I can own a pound of gold six months from now. One is to buy a pound of gold, and pay for storage and for insurance for six months. The other is to arrange with someone today to deliver me a pound of gold in six months. In that case, I don’t have to pay for storage and insurance, so I’ll be willing to pay more for gold in the future. In commodities markets, we say that this curve is in “contango,” where futures prices are above spot prices.

The important thing to realize, though, is that all of these things converge. The spot price of gold will eventually converge to the 6-month forward price of gold…in, as it happens, about six months. If there is no change in the price of insurance and storage, every day the spread of the futures price over the spot price will decline by one day’s worth of those expenses. (n.b. – there are other parts of the carry, too; I’m abstracting here for illustration). If nothing else in the market changes, then the spot price will gradually rise towards that forward price. Here is the important bit that markets people learn: in some sense, that is not a true profit:

Buy today: $1700 plus $10 storage plus $10 insurance = $1720 cost of gold 6 months’ forward

Buy for forward delivery: $1720.

In both cases, if I sell the gold six months and one day from now at $1720, I have made zero money, even though in the first case I paid $1700 for it. But it looks like gold rallied.

I’m not really here to talk about gold. I’m here to talk about economists.

Economists don’t really internalize this well. Case in point is the question about whether inflation expectations are ‘anchored.’ An economist – in particular, a Fed economist – looks at the following chart of 2-year inflation swaps since February and says “Expectations for inflation two years in the future rose between February and May, and then have been flat-to-down since then.”

But that’s not really what happened.

Someone who bought inflation swaps in early May got something that a buyer of inflation swaps today doesn’t get. The May 15^th version of inflation swaps, because of the way they work with a 3-month lookback, got half of the 0.6% March CPI print, plus the 0.8% April print, the 0.6% May print, and the 0.9% June print. The person who buys inflation swaps today doesn’t get March and April, and only half of the May uptick (plus June). Ergo, if nothing else changes we would expect the price for a 2-year inflation swap today to be lower than the price in mid-May.

As the high prints from the last few months pass into the rear view mirror (although there will be some high ones to come, I don’t really expect +0.9% m/m any time soon), the inflation swaps and breakevens markets should look softer. It’s just carry. But how much softer?

One way to find out what is really happening to inflation expectations is to look at the forwards. Let’s pretend for a minute that the CME had actually launched CPI futures a few years ago, and we had a CPI futures contract that traded in December 2023 (settling to the November CPI print that comes out that month). Over the last few months, what would have happened to the price of that futures contract? The chart below shows that it would have enjoyed a very steady rise over the last six months. The CPI futures contract settles (or anyway, it would have) to a particular price level. We would almost always expect the futures prices to be above the current NSA CPI number, which was 271.696 in June. But these prices – which I’ve calculated from an inflation swaps curve I build every day – are showing that investors have responded to these higher CPI prints by steadily raising their expectation of future prices.

If investors thought these last few months were going to be reversed in the coming months, then the forwards wouldn’t have responded in this way. Investors would be betting that the high prints would be followed by low prints that reverse the changes. However, that’s not what is happening. Investors are taking these high prints and putting them in the bank. While they might think the rise in the inflation rate is transitory, they don’t think the rise in the price level is transitory.

This is a key distinction. The inflation we are seeing, even if it later slackens, represents a permanent loss of purchasing power. How much of a permanent loss have we seen in the last couple of years? Here are my calculations of the theoretical futures curve for CPI, as of August 1^st, 2019 compared to last Friday. The last column shows how much higher investors think prices will be on those dates today, compared to what they thought two years ago.

Notice that this is from well before the crisis, and so takes into account the plunge in prices from early 2020 and the recent increases. After all of the zigzags, investors expect prices to be about 5% higher in 2023 than they would have thought previously, and about 8% higher in 10 years.

And I think they’re too sanguine.

Categories: Investing, Theory Tags: CPI, CPI Futures, Fed

Summary of My Post-CPI Tweets (July 2021)

July 13, 2021 Michael Ashton 5 comments

Another very special #CPI day! Welcome to my data walk-up.
Before we get started, let me tell you that I’ll be on @TDANetwork with @OJRenick this morning around 9:15ET. Accordingly, my post-CPI stuff might be slightly abbreviated. I’ll try to go quickly.
Setting the stage: we’re coming off of three consecutive upside surprises to core CPI. In each case, the interbank market trade was closer than the economists. Three months of 0.34%, 0.92%, and 0.74% m/m were impressive. Core CPI is at its highest since June 1992.
We were set to see the y/y figures rise on base effects anyway, but these were strong on a month/month basis – which have nothing to do with base effects.
It’s true the m/m figures were clearly flattered by the “COVID categories” like airfares (+7% last month) and used cars (+7.3% last month). But while the “transitory” crowd wants you to think that is the whole story, it’s not.
The truth is that the root cause here is phony demand caused by government spending financed by a loopy guy with a printing press. It is not “due to the reopening.”
I thought I made the point pretty well in “We Were Shocked – Shocked! – that Massive Stimulus Caused Inflation” https://inflationguy.blog/2021/06/23/we-were-shocked-shocked-that-massive-stimulus-caused-inflation/
In addition to the big outliers, there are a cluster of categories with y/y changes between 3% and 5%. Not all COVID categories! Our diffusion index is the highest since 2012.
So what is up for today. The ‘comp’ from last year is a more normal one, at +0.24%. The consensus economist forecast is +0.4% on core CPI, with the interbank market trading just a smidge higher than that. This sort of print would put y/y core CPI at (gulp) 4.0%.
Used cars still have some juice in them, based on Black Book and other numbers, so they’ll probably still be up in the ballpark of 3-4% m/m (huge error bars there). Still big, but getting to the end of the craziest m/m figures.
I want to keep an eye on new cars. That category is less volatile than used cars, but larger (~3.75% of CPI) and it looked last month like it was starting to accelerate.
There have been reports that some used car prices are above the prices of the same car, new. There are two ways that can change to something more normal. Used car prices can ebb, or new car prices can rise (or both, obviously). So keeping an eye on new cars.
Car rental rates have also been skyrocketing due to the shrunken fleets, and the surge in vacationers with stimmy money. Rental companies need more new cars.
But beyond the “COVID categories,” the key looking forward is (a) the breadth of the inflation increases, about which I’ve already commented, and (b) rents.
The eviction moratorium is still in place until the end of July, so the big catch-up that will happen when non-payers are turned out in favor of payers will not happen for at least a month or two.
But there is some evidence that the units that ARE turning over are at a high rent…so I suspect we will see more lift from rents this month, though the big months are ahead.
The timing of the end of the moratorium and the catch-up in rents is interesting, because the “hard” comps from 2020 are coming up. July ’20 was +0.54 core and August was +0.35%. So y/y might decline a bit over next few months (though this isn’t guaranteed with recent trends!)
Back at the beginning of the year, that was our expectation – a ‘fog of war’ from base effects causing a big jump then a big decline. However, the jump was bigger than expected and the decline may not be as impressive as we’d thought.
Rent catch-up might be worth 0.9% or so on core, so depending on how long the catch-up takes, the turn in the base effects might not be as impressive as we thought just a few months ago.
The Fed “cares” about such a move, especially if it’s broader… until stocks drop 5%. And then I suspect they’ll care more about keeping the wheels on the bus. So I’m not sure we’re about to see a sharp drop in QE very soon.
OK that’s all for the walk-up. Number is in 5 minutes. I think we might get a 4th upside surprise, but this is almost anticlimactic. The rest of 2021 is all about the rents.
- duh, 2022.
And after August, the next 6 months of core CPI average just 0.1%. So folks, I don’t think we’ve seen the highs yet. If we average 0.3% per month on core, we could see 5% core CPI y/y by early 2021!

That’s a transitory bus that just hit us.
0.88% m/m on core, pushing the y/y to 4.453%. So if it makes you feel better, both were rounded higher.

Well, CPI for Used Cars was +10.5% m/m, which is a lot more than I was looking for. That’s part of this.
COVID- categories: airfares +2.7% m/m. Lodging Away from Home (was flattish last month) +6.95% m/m. New Cars and Trucks +1.97%. Car and Truck Rental +5.18%.
Core Goods, thus, is at 8.7% y/y.
Of course, ex-everything-except- Medical Care, we are in deflation. Medical Care CPI was -0.10% this month.
Food Away from Home is up at a 4.23% y/y pace. But I am watching Food-at-Home, given the unrest we are starting to see around the world that smacks of the Arab Spring. Food-at-home was only +0.9% y/y.

Meat, poultry, fish, and eggs were +2.6% m/m, but most of the food-at-home category was reasonably well-behaved.
I haven’t mentioned rents yet because they were reasonably ham-on-rye. OER was +0.32% m/m, pushing the y/y to 2.34%; that’s a pretty normal monthly figure. Primary Rents, more directly affected by a spike in asking rents, was +0.23% m/m. So nothing there yet.
Core CPI ex-housing was 5.81% y/y, the highest since 1984. Of course it’s those COVID categories so this doesn’t tell us anything we didn’t already know. We’re going to want to look at the breadth.
Health Insurance was -1% m/m, and is now -6.9% y/y. Remember this was over 20% a while back and I THOUGHT that meant we’d eventually see pass-through to the other medical categories since Insurance is a residual. I’ve been wrong on that. No idea what is happening in med care.
So, we have a huge core number. What about median? In an inflationary cycle we’d expect core to be above median but a rise in median should still happen. Not worrisome yet…I am estimating +0.24% m/m for median this month.
at about 9:15ET, so as I said earlier this is a bit abbreviated. Apologies for that.
I have to go get ready to be on @TDANetwork
But here’s a quick summary: there’s nothing NOT scary about 0.9% on core. Except that there didn’t seem to be a lot of signs of further broadening of price pressures, and the pressure on rents hasn’t shown up yet. Indeed, Used Cars might have overextended & be due for a retrace.
We know what will lead the headlines! And four misses to the upside in a row runs the risk of un-anchoring expectations… but the next few months, post-eviction-moratorium, will be very important. Next two months will be tougher comps. But…0.9% would still beat them!

It was a quick one today. It is funny to think that just a few months ago, any 0.9% print on core CPI would have been interesting! Over the last quarter, prices have risen at a 10% annualized pace. Over Q2, core prices rose more (2.55%) than in the prior 18 months combined.

And yet, the 0.9% print was not too unusual. As noted, used car prices were up a lot more than I expected; basically, the entire spike in private surveys has now passed through to the CPI. Unless used car prices continue to rise at a similarly-blistering pace, that category probably shouldn’t add a lot to core CPI going forward.

New cars, on the other hand, are accelerating – the price of a substitute good normally does move in concert with the reference good – as the chart below shows. This is a potential source of surprises going forward. Or if not “surprises,” at least continuing momentum from the car crunch.

Other “COVID categories” were also bubbly. But that wasn’t surprising in itself. What I was on the lookout for was, as I said earlier, (a) a further broadening of price pressures, and/or (b) an early acceleration in rents even before the eviction moratorium expires, as various measures of asking rent suggest should be starting to happen. The chart below, of the Enduring Investments Inflation Diffusion Index, shows that the index was roughly unchanged this month near recent highs…so, no evidence yet of further broadening of inflation.

And, as noted above, Primary Rents and Owners’ Equivalent Rent were similar to the pre-COVID trend, but not yet reflecting the dynamics in the housing market. They almost always do, albeit with a lag. Our model below shows the effect of the moratorium as the difference between the current OER level and the model level, but note that the model also continues to rise for quite a while here. This is why it’s fairly easy to forecast that core inflation is going to stay elevated for a lot longer than the market is pricing. If the model is right, and rents rise at 4.75%, then if all core-ex-shelter components rise at only 2% the overall core index would still be at 3.1%. So when I predicted on TD Ameritrade Network this morning that core inflation for 2022 would average above 3% – a level it had not printed for even a single month in the last quarter-century until the last few months – I have some fair confidence in that. (Of course, the model could be completely wrong, or core-ex-shelter could be in outright deflation. But it’s also possible that core-ex-shelter could be rising at 3%).

This seems a good time to point out that 5-year breakevens are at 2.61% and 10-year breakevens are at 2.37%. There’s a lot of mean-reversion priced into those levels, and no long-tail-upsides.

This month, in short, we had COVID categories, broad inflation but no additional broadening, and no movement yet in rents. As far as 0.9s go, it was not too worrisome. On the other hand, if prices rise at a pace of 10% for very long then the Fed’s precious “anchored inflation expectations” are at serious risk. Ergo, I expect the Fed to start sounding more hawkish now. I also expect that they will drop the hawkish talk once stocks drop 5%. If stocks drop 10%, they’ll start actively talking about additional stimulus. This Fed is not of the talk-softly-but-carry-a-big-stick school. They’re of the talk-loudly-but-run-if-they-call-your-bluff type.

Categories: Uncategorized Tags: core cpi, core inflation, CPI, economy, Fed

We Were Shocked – Shocked! – that Massive Stimulus Caused Inflation

June 23, 2021 Michael Ashton 2 comments

At one time, when I worked for big global banks, I wrote a commentary daily. As a consequence, I would remark on almost literally every “important” fed speech (the quotation marks being because, in the last decade or two, almost none of those speeches were at all meaningful since they had already given us the playbook in plain English). Nowadays, I delight in the fact that I don’t regularly have to comment on the drivel that dribbles from fed mouthpieces. At times, though, it becomes too much to ignore and something need to be said.

“A pretty substantial part, or perhaps all of the overshoot in inflation comes from categories that are directly affected by the re-opening of the economy such as used cars and trucks.”
Jerome Powell, June 22, 2021

This has become a very easy meme for Fed officials and disinflationistas: inflation is “transitory” over some unstated period, because almost everything we are seeing is the direct result of the abrupt reopening of the global economy.

Let’s examine that. In what way is the price increase in used cars and trucks due to the reopening?

In a normal cycle, there wouldn’t be sudden and huge demand for used cars all of a sudden. Nor would there be a sudden and huge demand for all sorts of other goods and services – shipping containers, chlorine, semiconductor chips, polypropylene, contract labor. In a normal cycle, demand recovers gradually and supply adjusts to the new demand gradually. Suppliers have time to read market signals and to bring new production on-line. A manufacturer of plastic doodads forecasts that in three months, he’s going to have enough demand to need a second shift – so, he puts advertisements in the paper and starts to selectively hire workers for a second shift. When the demand shows up, he is ready.

So clearly, the big mismatch between supply and demand in this cycle is the problem. And it isn’t just in used cars and trucks. It isn’t just in hotels and airfares. In fact, it is a myth that there is a small set of categories that are inflating wildly while other prices are inert. The chart below shows Enduring Investments’ Inflation Diffusion Index. More categories are seeing acceleration inflation, than are not.

Sure, a few categories add most of the acceleration, mathematically. That is always true. The combination of weight in the basket and size of the move means you can always point to one item or set of items that this month caused a big increase. I first mentioned my “microwave popping corn” analogy back in October. The fact that you can identify a particular reason that a kernel popped does not mean that you have found the root cause of all of the kernels popping. (As an aide, that article addressed the rise in used car prices that was just starting to happen. Back in October, when most of the world was still 90% on lockdown).

Again, there’s no question about the fact that one link in the causal chain is that demand came back before supply could prepare for it. But whose fault is that?

It isn’t merely the fact of the reopening. If Administration officials had simply decided on January 1^st to let people go back out into the world again, demand would not have exploded overnight. Buying things requires money. In a normal cycle, suppliers would have started to hire for the reopening; they would have paid the workers, who would then have money; some of those people would go and buy used cars. It would surely have happened more quickly this time since the gate was being removed all at once. But many consumers would have had to spend time repairing their personal balance sheets and would not have suddenly gone out to buy new cars. Instead, what happened is that the Congress dropped a couple trillion dollars into consumers’ accounts, and – a crucial part of this sequence – the Fed bought the bonds that the Treasury had to issue in order to spray that money into the economy.

That last step is important. If the Treasury had just spent a trillion dollars and issued a trillion dollars’ worth of bonds, it would have had an impact but only because the money was being sent to consumers with a high propensity to consume, while the money being pulled in to pay for it was coming from investors with a lower propensity to consume (investors buying the bonds now have less cash to spend). So the spending package would matter, but not nearly as much as spending a trillion, and issuing bonds which the Federal Reserve expands the money supply to buy. A great chart from Deutsche Bank Research illustrates this cleanly: the Fed bought a huge proportion of the bonds the Treasury sold.

So trillions of dollars of the demand pressure are coming from debt being sold to a guy with a printing press. That is fake demand. It is not “due to the reopening.” It’s due to spastic fiscal policy, coupled with profligate monetary policy. And, as the used car example shows, it started happening long before the economy was getting “back to normal.” So while Powell and his minions feign surprise and shock at the outcome, it only means they are either deceitful or incompetent. The root cause here is absolutely clear, and the only reason that Chairman Powell can get away with claiming otherwise is that he is speaking to another body that is even more deceitful and incompetent.

Categories: Uncategorized Tags: Fed, inflation

Summary of My Post-CPI Tweets (June 2021)

June 10, 2021 Michael Ashton 1 comment

It’s #CPI day again! Welcome to my data walk-up. And a special welcome to all the new followers this month. I can probably plot new followers as an indicator of interest in the subject of inflation.
As the inflation guy, I ALWAYS look forward to this day but this is one that is going to be a lot more-widely watched than most. And for good reason.
Last month, core CPI shocked everyone with a +0.92% m/m reading, the highest in 40 years; the y/y core was the highest in a quarter-century. And this month, the y/y core will rise to the highest level since the early 1990s. Only question is what year in the early 1990s.
That’s baked in the cake; the comp from last May was -0.07% so core will rise today, by a lot. Consensus is +0.5% m/m, pushing y/y to ~3.5%. The inflation swaps market is slightly above that, more like 0.6%. And the swaps market has been right on the last couple of surprises.
Before we relitigate last month’s print, let’s actually look to the PRIOR month, the March figure that dropped [ed. note: meaning, “was released”, not “declined”] in April. With last month’s fireworks we forget that March’s number (+0.34% m/m on core) was also a surprise. Moreover, it was a BROADER surprise.
The March CPI was NOT flattered by airfares and used cars, which were the main culprits from last month. Nor by rents. It was due to large moves in small components that no one was expecting to see jump.
Honestly we could see last month’s jump coming (maybe not that much). March was a true surprise.
THAT is the story we need to be watching behind the fireworks. The Enduring Inflation Diffusion Index, meant to measure the breadth of inflation pressures, last month reached the highest level since 2012.
The Fed can write off Used Cars as “transitory.” But it’s less plausible that EVERYTHING is transitory.
(At some level, “Transitory” doesn’t really mean anything useful unless you specify the period – see my note “All Inflation is Transitory” https://inflationguy.blog/2021/05/20/all-inflation-is-transitory/ )
So now moving forward to April’s figure last month. Used cars and airfares were both up more than 10% m/m. Lodging Away from Home rose 7.65% m/m. And that was the reason for the massive move.
Spoiler alert: last month’s rise in Used Cars CPI is only a fraction of what is still coming. See chart of the Black Book index vs the CPI for Used Cars.

Does that mean we will get another 10% rise in Used Cars this month? It actually could be worse (although the rise in the data could also smear over several months). This is why it’s not heroic to forecast 0.5% m/m on core CPI. Can get there easily.
Airfares and Lodging Away from Home should also see upward pressure but there are more zigzags there. But what I really want to look at are Primary Rents (you are a renter) and Owners’ Equivalent Rent (you own your home).
The eviction moratorium, which by my estimate is dampening overall core CPI by around 0.9% through the medium of rents and OER, is still in place. So we DON’T have an a priori reason to look for a rental jump. Thus if we get one – it will be caused by something else.
That something else is that as the country has opened up, and people have been moving hither and yon, rents have been jumping (along with home prices) even more than before. And some of that might find its way into the CPI. It probably should.
Without housing turning higher, it’s hard to sustain big inflation figures. But rents are going to turn higher, just not clear exactly when.
And of course, I’ll be looking at the broader pressures down the stack to the little stuff. That’s where the high cost of containers, plastics and packaging, freight, and the shortage of labor (among many other things) is going to show up.
MY GUESS is that rents stay tame with just a little uptick, used cars are still strong, we see a little strength from new cars as well, and we get another above-consensus number. I can come up with scary scenarios for this print. It’s harder to come up with gentle ones.
Well it should be a barn-burner. Up until now, the Fed hasn’t cared. Last month got them to talk about talking about someday maybe not doing as much QE. Another month might accelerate that talking about talking. Especially if it’s more than Used Cars.
But the comps get “harder” for the next 3 months; Jun-Aug 2020 were +0.24%, +0.54%, and +0.35% on core CPI. So we’ll need the strength to last into the fall before the Fed gets truly nervous. And I still think the clear majority doesn’t put inflation as a serious priority.
It’s up to the bond vigilantes to push the Fed to being more serious about inflation. But the bond vigilantes are enjoying the “Greenspan put” equivalent in the bond world.
Buckle up! That’s my walk-up. Number is out in a few.

Surprise! It’s a surprise. 0.7% on core.
Actually 0.74% m/m on core, for those who still care about hundredths! Y/y is 3.80%.

Core highest since June 1992.

Lagarde comments that inflation pressures in Europe remain subdued. READ THE ROOM!
Used cars +7.29% m/m. OER +0.31%. Primary Rents +0.24%. Airfares +6.98%. All of those are m/m.
Used Cars…still could have more to go!

Another month of changing the scale on my charts. Here is core goods and core services. Core goods (used cars) is getting the play but don’t ignore the recovery in core services.

That rise in core services is with Medical Care very very soft. Pharma (which is core goods) was -0.08% m/m; Doctors’ Services -0.03%; Hospital Services +0.16%. This remains a real conundrum.
Apparel was +1.22% m/m. Now, apparel is only 3% of the overall CPI, but I think we’re seeing the effect of shipping costs here since most apparel is imported.
The small rise in rents was in line with my expectation. But we haven’t yet seen any of the real jump to come when the eviction moratorium is ended.

Core CPI ex-shelter was +4.94% y/y. That’s something we haven’t seen since 1991. Of course, that’s also mostly cars at this point. Need to get further down the stack to see how broad it is.
It probably though IS worth noting that the rise in core-ex-shelter isn’t compensating for a prior collapse. It dipped some in early COVID. But we’re way beyond that.

I’d also mentioned expecting to see some participation in new cars. Here is y/y. Partly this is rise in the price of a substitute, part is increased costs (from plastics and rubber to steel).

Rise in New Car prices is a little harder to explain away than used cars, which is spiking partly because of 2020 rental fleet shrinkage, which leaves the supply of used cars tight.
Car and Truck Rental: tiny category but visceral. +10% m/m. If you’re traveling this summer and haven’t rented your car yet…you may already be too late. It’s hard to find them.
Domestic Services +6.42% m/m NSA. Moving/storage/freight expense (from consumer’s perspective) +5.5% m/m NSA, +16.2% y/y.
Early look at Median CPI, which gives a better look at pressures without outliers…my estimate is +0.32% m/m. That would be the highest in two years if I’m right. Median is never going to be as volatile as core, but we don’t want to see it +0.3% m/m regularly.
Key point about median and core though: in a disinflationary environment core will generally be below median. In an inflationary environment, it will generally be above. So if we’re shifting environments so all the tails are higher, then the core/median switch will persist.

My first glance at 10y breakevens since the number finds them +4bps on the day. They’ve been under pressure recently, I suspect less because people thought this would be a soft number and more because they’re looking for higher-inflation-beta products like commodities.
As a brief aside, I think people underappreciate what breakevens could do if there is a movement in investor allocations. There’s nearly $2 Trillion of TIPS outstanding. But the FLOAT is nowhere near that. When they’re gone, they’re gone.
Let’s see: rents tame with a little uptick. Check. Cars still strong. Check. a little strength from new cars as well. Check. Another above-consensus number. Check!
Let’s see. Biggest losers and gainers. No category had an annualized decline more than 10%. But above 10%: Infants/Toddler’s Apparel, Motor Vehicle Parts & Equipment, Meats Poultry Fish & Eggs, Household Furnishings and Equipment, Footwear, Women’s & Girls’ Apparel, (more)
Fuel Oil & other Fuels, Jewelry & Watches, Public Transportation, Used Cars and Trucks, Car and Truck Rental, Leased Cars and trucks.
Haven’t run this chart in a few months. Shows the distribution of lower-level price changes, y/y. The big middle finger is mostly OER. But look at not just the far right tail but the group between 3% and 5%.

Just a couple more items here. The diffusion index and then four-pieces. The Enduring Investments Inflation Diffusion Index rose to its highest level since 2012 today. Another way to look at the broadening of price pressures.

We will do the four-pieces charts and then wrap up. The four-pieces charts is a simple way of looking at the drivers of inflation. Each of the pieces is very roughly 1/4 of the index (20%-35% actually). But it puts like-with-like.
…and they’re also in roughly volatility-order. First, Food & Energy. BTW a lot of this is food for a change. Food inflation is not pretty. But this is ‘non-core.’

Piece 2 is core goods. We’ve already seen this. New and Used Cars, Medicinal Drugs, e.g. Clearly this is a big driver at the moment.

Piece 3 is core services less rent of shelter. And there’s no comfort here. This includes medical services, which really aren’t doing anything. Household services. Car rental. Stuff like that.

And lastly the slowest moving piece, Rent of Shelter. This is rising, but right now it’s mostly because of lodging-away-from-home. To be fair that was a big part of the prior slide. Rents as we have already seen aren’t doing a lot. Yet.

If you want to be optimistic about inflationary pressures, you want to have rents stay tame. This is really hard when home prices and asking rents are shooting higher. If you want inflation to be transitory, you really need a home price collapse. I don’t see that…
Not to say home prices aren’t a bit frothy right now. But the conditions for them to collapse nationally, pulling rents and thus inflation down with them as in 2009-10, don’t seem to be there. But that’s the biggest/only risk I see to higher inflation through 2021-22.
That’s all for today. I’ll publish a compiled tweet list on my blog later this morning. You can get that blog at https://mikeashton.wordpress.com . But if you want more than talk, visit Enduring Investments at https://enduringinvestments.com and drop me a line.
Thanks for tuning in. Hope all of you new followers are generous with your RT and follow recommendations!

A second month of large increases in core inflation should be followed by a second month of Fed speakers downplaying the importance of the ‘transitory’ price increases. The rise in used cars and lodging away from home play into that narrative, but there are broader pressures here and they will show up more this month in other inflation measures such as median or ‘sticky’ CPI. But if bond yields don’t respond to the inflation threat, then neither will the Fed. Talk is cheap, and it is easy to say that inflation pressures will be “transitory” (and surely, they won’t continue at 0.8% per month on core), but when that talk is backed up by a placid government bond market it keeps the pressure off of the FOMC to do anything.

To be sure, I don’t really expect the Fed to be doing anything anyway. While the entire Committee isn’t exactly in line, Chairman Powell is the vote that matters. And he (along with the moral support from Treasury Secretary Yellen) continues to repeat that inflation is not a problem, and anyway it isn’t as important as making sure that everyone has a job, at any cost. (Students of history should note that the early days of the Weimar inflation saw a similar preoccupation with getting everyone employed, even if money had to be printed to do it!)

So, we continue to watch our money lose value, with the policymakers continuing to fiddle while Rome burns. There are places to hide, but they will get crowded pretty quickly once everyone realizes they need shelter. I don’t think this inflation is “transitory” in anything but a trivial sense that it will eventually pass. We don’t have to get to 8% inflation for it to be damaging to the psyche of the investor, consumer, and producer who has become acclimated to 2%. Sustained core inflation near 4% would be sufficient to break the back of the disinflation of the last forty years, in my view. We should get a test of that thesis, because we aren’t going to see appreciably lower core numbers until sometime in 2022.

Categories: Uncategorized Tags: core cpi, core inflation, CPI, Fed, inflation

Newer Entries Older Entries

E-piphany

Archive

Summary of My Post-CPI Tweets (February 2022)

Like this:

Anatomy of a Monetary Policy Error

Like this:

The Coming Peak in Inflation (and Why You Should Hold Off on the Party)

And Then There’s the Fed

Like this:

Summary of My Post-CPI Tweets (December 2021)

Like this:

Summary of My Post-CPI Tweets (October 2021)

Like this:

Summary of My Post-CPI Tweets (September 2021)

Like this:

CPI Forwards Show Inflation Concerns Aren’t Ebbing

Like this:

Summary of My Post-CPI Tweets (July 2021)

Like this:

We Were Shocked – Shocked! – that Massive Stimulus Caused Inflation

Like this:

Summary of My Post-CPI Tweets (June 2021)

Like this:

Email Subscription

Recent Posts

Pages

Top Clicks

Archive

Share this:

Like this:

Share this:

Like this:

And Then There’s the Fed

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Email Subscription

Recent Posts

Pages

Top Clicks