inflation | E-piphany

Bounce in Money Growth is Good News and Bad News

April 23, 2024 Michael Ashton 2 comments

The monthly money supply numbers are out. I have bad news and good news.

The bad news is that the contraction in the money supply appears to be over. That’s not bad news per se (see below), but it’s bad in that the anti-inflationary work that was happening is coming to an end before it’s quite finished. Although I would be reluctant to annualize any one month’s change in M2, the $92bln increase in M2 in March was the largest increase since 2021. It only annualizes to 5.5%, so it isn’t exactly running away from us – but it’s positive. The 3-month and 6-month changes are also positive, and the highest since early 2022 in each case. Again, we’re only 0.72% above the ding-dong lows of last October, but the sign is now positive.

With the money supply figures now in, and with the advance Q1 GDP report due this week, we can revisit our chart of “how much more inflation ‘potential energy’ remains.” (see “Where Inflation Stands in the Cycle,” November 2023). As that article (and this chart) illustrates, if M2 doesn’t go down then this gets more difficult. M2 in Q1 rose at a 1.24% annualized rate over Q4. GDP is expected to rise 2.5% annualized. So M/Q…barely moves, as the chart shows.

We will eventually get back to the line, unless velocity is permanently impaired. Despite all of the crazy people who told you it was, there’s no evidence of that. M2 velocity will rise about 1% (not annualized), if the GDP forecasts are on point. That will be the smallest q/q change in several years, and velocity will be getting very close to the 2020Q1 dropping-off point. But there frankly is no reason for velocity to stop there; higher interest rates imply higher money velocity. However, we are getting close.

(Incidentally, if you’re curious how we can be almost back to the dropping-off point of velocity and yet still be 5% below the line in the first chart above, it’s because I’m using core inflation. With food and energy, we’re a little closer to the line and have used up more of the ‘potential energy.’ But food and energy are of course volatile and so while a good spike in energy prices would look like we’ve used up all of the potential energy, that could just be a one-off effect.)

Either way, we aren’t too far away from getting back to home base and that’s good news. Yes, prices by the time we are done will have risen 25% since the end of 2019, and that can’t really be characterized as a ‘win.’ Let’s go Brandon. But we are getting closer.

The good news about the new rise in M2 is that it’s timely. Markets and the economy were starting to show signs of money getting a little tight; losing a little lubrication in the machinery. An economy does need money to run, and while the only way we can get back to the old price level is to have money supply continue to decrease, that’s also a painful process. In the long run, we would have price stability if the change in M was approximately equal to the change in GDP. If we want 2% inflation, then we need M to grow about 2% faster than GDP. Vacillating velocity means that it isn’t purely mechanical like that – the steady decline in velocity since 1997 is the only reason that inflation stayed tame despite too-fast money growth over that period – but the long downtrend in velocity is likely finished since the long decline in rates is finished. Thus, if we get money supply growth back to the neighborhood of 4%, we can get our 2-2.5% growth with restrained inflation over time.

I am not super optimistic that all of that will work out so nice and cleanly like we draw it up on the chalkboard, but I am more optimistic about it than I was two years ago. We still have some sticky inflation ahead of us, but if the Fed keeps reducing its balance sheet then eventually we will get inflation below the sticky zone and back towards ‘target’ (even though there isn’t a target per se any more).

Categories: Causes of Inflation, Monetarism Tags: CPI, Federal Reserve, inflation, money supply, velocity

Inflation Guy’s CPI Summary (Mar 2024)

April 10, 2024 Michael Ashton 7 comments

After a week when the NY/NJ area saw an earthquake, an eclipse, and a gorgeous 75-degree spring day, it is time to get back to work.

Today’s CPI report was not expected to be particularly great. In fact, one of the biggest conundrums of market behavior recently has been the question of why investors seemed to remain very confident that the Fed will cut rates several times this year, even as forecasts for the path of inflation have backed off of what they were last year (when most forecasters had core CPI returning placidly and obediently to the neighborhood of 2% this year). The a priori consensus forecasts for today’s CPI figure were +0.28% m/m on core and +0.33% m/m on headline. The Kalshi market was in line with that, although CPI swaps were a touch lower on headline at +0.29% (seasonally adjusted, but CPI swaps trade NSA CPI). That’s not wonderful: 0.28% on core would annualize to 3.4% y/y.

The assumption has been that even if in March we are annualizing to 3.4%, the coming deceleration in rents will push everything back down to where it needs to be. The problem with this has always been (a) the strongly-held belief that rents would slip into deflation this year were never based on good analysis, and more importantly (b) this assumed that nothing unforeseen would happen in the other direction. It is characteristic of inflationary periods, of course, that bad things happen on the upside. So this was always sort of assuming a can opener,[1] but at least forecasts for the current data were reflecting that these things had not happened yet. To be fair, the consensus on core has been low relative to the actual print for four months in a row, but at least folks are forecasting mid-3s, rather than 2.0.

Now, let’s review one other thing before we look at some charts. The recent story boils down to this: sticky rents, sticky wages. While core goods has been pulling down core inflation, that game was running out of room. The next part of core deceleration relies on un-sticking the sticky rents, and sticky wages.

So here we are. Today’s figure +0.36% on core CPI, +0.38% on headline (seasonally adjusted on both). This makes the last 3 core CPIs 0.39%, 0.36%, and 0.36%. The chart below of the m/m core CPI figures does not really give the impression of a decelerating trend.

We always look these days first at rents, because that is so important to the disinflation story. Rent of Primary Residence was +0.41% m/m, down from 0.46% last month. Owners’ Equivalent Rent was steady, at +0.44%. Remember that there had been some alarm two months ago, when OER for January jumped to 0.56%, that this was due to a new survey method or coverage and it was going to be repeated going forward. That was always pretty unlikely, but now we have had two months basically back at the old level and the January figure appears to be an outlier. 0.41% on Primary and 0.44% on OER is not hot, just sticky. It isn’t going up; it’s just not going down very fast.

Rents will continue to decline. But the failure of rents to slip into deflation is a source…maybe the source…of the big forecast error made by economists about 2024 CPI. Our cost-based model for primary rents, which never got even vaguely close to deflation, has now definitively hooked higher with the low coming in November. Rents haven’t been decelerating as fast as our model had them, but if anything that’s a source for concern on the high side.

Outside of rents, core inflation ex-housing rose to 2.38% y/y. That sounds like “most of the economy is on target,” but that’s not how inflation works. There’s a distribution, and if the ‘rents’ part of the distribution is going to be higher than the target then everything else needs to average something below the target. We aren’t there. And, as I noted above, we’ve squeezed out just about everything we can from core goods. Actually, y/y core goods dropped to -0.7% thanks partly to continued declines in Used Cars (-1.1% m/m) and some decline this month in New Cars (-0.2%). I think the latter might partially reflect discounts on the EV part of the fleet, where cars for sale have been piling up as manufacturers under political pressure have been producing far more of them than people want.

Note that core services, even with the decline in y/y rents, moved higher this month to 5.4% from 5.2% y/y. Some of that was medical care, which was +0.49% m/m driven by another jump (+0.98% m/m) in Hospital Services. The y/y rise in Hospital Services is now up to 7.55% – the highest since October 2010.

Partly driven by hospital services, the ‘super core’ (core services ex-rents) continues to re-accelerate.

Again, this is not what the Fed wanted to see; and it’s driven partly by the stickiness in wages. The Atlanta Fed’s Wage Growth Tracker has decelerated but is still at 5.0% y/y. That’s not the stuff that 2% core inflation is made of.

Let’s take one moment to look at a piece of good news from the report. My estimate of median CPI, which is my forecast variable because it is not subject to outliers like Core CPI, is +0.32% for this month. Because I have to estimate seasonals for the regional housing numbers, actual Median might be a teensy bit higher or lower but in any event the chart of Median CPI is much less alarming than the chart of Core CPI.

I should observe that the news there is not completely good, since a signature of inflationary environments is that tails are to the upside – that is, core is persistently above median. That was true during the upswing, but during the moderation core has gone back below median. But this bears watching, and if core starts to routinely print above median it will be a negative sign. For now, though, the Median CPI is good news. Relatively.

So let’s talk policy.

The Administration always seems to be confused about why, despite strong jobs numbers, consumers consistently report dissatisfaction with the economic situation. There really shouldn’t be any confusion. Consumers, especially those not in the upper classes, hate taxes. And in addition to a high direct take from the government in explicit taxes, consumers are also facing persistent inflation that the Administration says isn’t there. Inflation is a tax, and it sucks worse than direct taxation because you can’t rearrange your consumption very well to avoid it. (You can rearrange your investment portfolio, but a strikingly small number of people seem to have actually done that even three years into this inflation episode. If you’re curious about how, you really should visit Enduring Investments and ask.)

On the other question of policy, and that’s the Fed: I can’t see any rational argument for cutting rates in June. Actually, on the data we have in hand I can’t see an argument for cutting rates in 2024, except for the one the Fed doesn’t consider and that’s that interest rates don’t affect inflation. To cut the overnight rate, the Fed would have to rely on forecasts that inflation is going to get better. And to do that now, when forecasts have been persistently wrong (and not by just a little bit but about the whole trajectory) since 2020, would be incredibly cavalier. The FOMC still consists of human beings, so never say never. And the inflation data should improve as the year goes along and rents moderate. I just don’t see any sign that it’s going to moderate enough to say ‘we’ve reached price stability.’ Sticky in the high-3s, low-4s is still where I think we’re coming out of this.

[1] A physicist, an engineer, and an economist are stranded on the desert island with nothing but a crate of canned food. “How are we going to get the food that is inside of these cans?” asked one. The physicist says “well, we could heat the cans, carefully, in a crucible we make from ocean clays. Eventually the heat will cause the can to burst and we can get the food inside.” The engineer says “that will take too long. What we need to do is take some of these coconuts, raise them up to a great height with a series of ropes I will design, and allow them to smash down onto the cans, breaking them open.” The economist says “I have a solution that is far easier than what you fellows are doing. Here is how we do this. First, assume a can opener….”

Categories: CPI, Federal Reserve, Monthly CPI Summary Tags: core cpi, core inflation, CPI, economy, Fed, inflation

When to Own Breakeven Inflation

February 7, 2024 Michael Ashton 5 comments

It is interesting to me that, with as important and liquid as the inflation-linked bond market is, tactical allocation between TIPS and nominal bonds is at best an afterthought for most investors. Perhaps this is because TIPS – if you think in nominal space, like most investors do – can be quirky and complex to analyze on a bond-by-bond basis. Here’s a picture of the TIPS yield curve. The red line is the way that TIPS real yields are calculated, and therefore the curve as perceived in the market. The green line is the true yield curve, adjusting for the way the seasonality of inflation prints affects each particular bond.

That’s understandable, but I don’t think it’s sufficient. Most investors do not invest in individual bonds, especially in TIPS space. They invest via mutual funds or ETFs, although the ‘laddering’ of TIPS to form a crude inflation-linked annuity is a popular approach amongst do-it-yourselfers. So why do so many investors own nominal bonds, instead of inflation-linked bonds, as an immutable strategic allocation? Even those who make occasional tactical shifts into TIPS seem to do so when they are expecting inflation to rise, and so are making a macro call instead of a quantitative call. But there are lots of times when owning TIPS instead of nominal bonds is just a good bet, regardless of your immediate inflation view. The most obvious one I wrote about back in March 2020 in “The Big Bet of 10-year Breakevens at 0.94%,” and I’ve also written generally about why you might want to be long inflation-linked bonds even if the current level of implied inflation (aka ‘breakevens’) is near to fair on the basis of your own view about the trajectory of inflation (see “A Guess at the Value of Long Inflation Tails” as an example).

But the times when just being long TIPS instead of nominals…or being long breakevens or inflation swaps if you do it as a leveraged play…is advantageous are not limited to unusual circumstances. TIPS also have tended to be systematically cheap over long periods of time, which I’ve also documented. Another way to consider the same question is to ask, “if I bought 10-year breakevens when they were at a particular level, how would I have done historically?” Or, equivalently, “if I had switched into 10y TIPS, instead of 10y Treasuries, when the spread was at a particular level, how much would I have out- or under-performed historically?” The chart below answers that question.

I went back to February 1998. For each of 6,453 days (ending in June 2023 since I had to look forward 6 months) I considered the starting 10-year breakeven rate and calculated the return to being long that breakeven over the next 6 months.[1] That return is dependent on the relative yields of the different securities, how those yields (and hence the breakeven) changed over time, and how actual inflation developed. It’s worth pointing out that this time period, core inflation was below 3% for 90% of the time. Ergo, you wouldn’t expect to have lots of big wins because of inflation surprise, although of course toward the end of the historical period you did.

The chart shows for each bin (I threw all 58 days with 10-year breakevens lower than 0.75% into the same bucket, which turned out to be equal to the number of days in the 2.75%-3.00% bucket) what the average 6-month return was to being long 10-year breakevens along with the 10^th percentile and 90^th percentile. So you can see that on average, you didn’t lose money being long breakevens anywhere under 2.50%, despite the fact that inflation throughout this period was very low. That’s a function of what I said before, that TIPS in general were cheap throughout this period. And if you bought breakevens (or switched into TIPS) any time that the breakeven was below 1.5%, you had a 90% or better chance of winning.

Naturally, it shouldn’t be a surprise that if you buy breakevens at a cheap level – as with any asset – you stand a better chance of winning than if you bought it at a dear level. What is a little more of a surprise is that there hasn’t historically been very much pain, on average, to being long breakevens even when they are high. In fact, unless you bought breakevens above 2.75% – basically, one event in 2022 – you had at least a 40% chance of winning your bet (10y TIPS outperforming).

This isn’t to say that there aren’t a lot of ways to lose, trading or investing in TIPS. Like any other investment, they can lose money and in 2022-2023 being naked long TIPS was almost as painful as being naked long any other fixed-income instrument. Almost. You did lots better than if you’d owned nominal Treasuries through the same episode!

[1] I used the Bloomberg US 10 year Breakeven Inflation Index, which is a total return index (BXIIUB10 Index on Bloomberg), from its inception in 2006; prior to that I used Enduring Investments calculations which utilized roughly the same methodology.

Categories: Investing, TIPS Tags: inflation, inflation-linked bonds, TIPS

Inflation Guy’s CPI Summary (Dec 2023)

January 11, 2024 Michael Ashton 10 comments

You can follow me on X at @inflation_guy. Sign up for email updates to my occasional articles here. Individual and institutional investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Check out the Inflation Guy podcast!

I’m changing the way I do the monthly CPI analysis. Doing it live for an audience was always stressful, especially with the inevitable data issues from time to time. Of course, as an inflation investor/trader I’ll still do it live; I just don’t have an audience. The nice part about doing it live was that the monthly report had a very similar structure to it with the same charts all of the time, and that will change. But it also means that I can lead with the important stuff sometimes, like this month. So I’m going to start today’s discussion of the slightly above-consensus CPI report (+0.31% on core, vs expectations for +0.25%) by saying the quiet part out loud:

Rents aren’t collapsing. They are decelerating, and they will continue to do so, but they are not going into deflation. Everyone today seems to be acting as if this is some huge shock, but it really isn’t. The only reason to ever have thought there would be rental deflation in an environment of housing shortage was that some of the high-frequency rent indices (which are not designed to be high-quality data; they’re data derived from a business that have been packaged as if it is high-quality data) suggested declines in rents, and an influential article – I talked about it in episode 74 of the Inflation Guy podcast – popularized the notion that you could get more information from the BLS by looking at less data. But the cost side has never improved for landlords – in fact, it keeps getting worse – so it was hard to see how there would be a general decline in rents. In some parts of the country, from which people are migrating away, e.g. perhaps inner cities, rents may fall. But those people have to go somewhere. Big migration means the housing stock is now all in the wrong places, and rents go up when there’s a shortage faster than they fall when there’s a glut.

Anyway, both my costs-based rents model above and my old rents model below suggest the same destination for rents – middle of this year or just afterwards, y/y rents should get to around 2-3%. That’s a lot lower than the current run rate for rents, of +0.47% m/m for OER and +0.42% for Primary rents this month, but it’s also far above what the general expectation has been for this large part of the consumption basket. Moreover, it appears that the longer-term pressures are for that part of inflation to scoop back higher, not lower.

So, today’s rents number was a little surprising, but not that surprising. Some are attributing the miss today to ‘just rents,’ as if it’s okay for the largest part of the CPI to have a trajectory that’s confounding many forecasts, but it wasn’t just rents. Median inflation was +0.42% m/m, keeping the y/y number above 5%. And three of the last four figures have been in that zone. Median should keep decelerating too, but it is not collapsing.

Now, I’ll note that Used Car prices were weird, again. They rose +0.49% m/m, when I (and most folks) had expected a decline. They’ve been a bit squirrelly for a while, with official inflation printing higher than the private surveys fairly persistently for 6-9 months. But on the other hand, airline fares have been persistently squirrelly lower compared to jet fuel, so these two things were ‘errors’ in the opposite direction. This month, airfares also rose, by about 1% m/m – but that was right about where it should have been given the change in fuel prices and not a surprise.

Now, the diffusion stuff is looking better, and supports the idea that median inflation will continue to decelerate.

Such a deceleration has been and continues to be my forecast. I expect median inflation to settle in the high 3%s, low 4%s, and be hard to push much below that. In the near-term, meaning maybe by early H2 of this year, we could get some numbers a little below that as the rent deceleration continues. But then the hook happens. It will be hard to get inflation below 3% for very long, especially if the Fed decides to stop shrinking its balance sheet and money supply growth recovers.

So the system is normalizing after COVID (and more relevantly, after the spastic and dramatic fiscal and monetary response to COVID). But normal is no longer sub-2%. Core services ex-shelter (so-called “supercore”) abstracts both from the deceleration in housing and the sharp drop in core goods, and it is hooking higher (this is partly because Health Insurance had been artificially depressing it and that effect is waning).

Supercore is unlikely to really plunge either. Wages remain robust. The Atlanta Fed just released its Wage Growth Tracker, at 5.2% for the fourth month in a row. The spread between median wages and median inflation, which had been stable around 1% for a long while, is heading back there (see chart). So again, we’re looking at something around 4% for median inflation unless wages start to decelerate…and there’s as yet no sign of that.

The bottom line is that while this number was only a little bit surprising, it was surprising for all the wrong reasons. There is nothing in this figure that suggests the Fed can comfortably abandon a tight-money policy and think about easing soon, and I don’t expect them to do so.

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

Summary of My Post-CPI Tweets (Nov 2023)

December 12, 2023 Michael Ashton 8 comments

Below is a summary of my post-CPI tweets. You can follow me on X at @inflation_guy. Sign up for email updates to my occasional articles here. Individual and institutional investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Check out the Inflation Guy podcast!

Welcome to the #CPI #inflation walkup for December (November’s figure). This is the last month I’ll be doing this live!
Thanks to all of you who have subscribed, voting with your dollars that this was useful. I’ve suspended all renewals so you will no longer be charged after today. I’m deeply grateful that you participated in this experiment. Thank you!!
As in the past, if you miss the live tweets, you can find a summary later at https://inflationguy.blog and I will podcast a summary at inflationguy.podbean.com . Those will continue in 2024 after the live tweeting stops.
For this month, I’m on top of the consensus economists’ forecasts for core, but higher for headline. I left Cleveland Fed out because it’s routinely the worst.

Here’s a rough sketch of where I get my core. Average of the last 3 core numbers is 0.28%; average of the last 6 is 0.26% but that includes a couple of outliers. Average of the last 6 median CPIs is 0.34%. Roughly, overall trend core is about 0.28%.
But we have to add 1bp for Health Insurance; and I’m writing in -1% m/m for Used Cars which is a 3bp drag. That’s an abbreviated version of how I get 0.26%, but it’s pretty close.
A quick word on Used Cars, which I have as a drag but some of the big shops have as a +. Black Book fell about 3.7%, seasonally adjusted, last month. The seasonals are an add back, but the add back is much less than the decline. I might be wrong on this, but I don’t see the add.
That said, there were several months recently that SHOULD have been an add, and were a subtraction, so maybe some economists are expecting a correction. Or maybe my model is just bad.
What I am NOT including is any drag from airfares. If you’ve followed these tweets in the past you know that airfares have been quite low for the level of jet fuel prices (see chart, red dot is end-of-Nov fuel and end-of-Oct SA fares)

This month, jet fuel prices plunged, so I think some people have penciled in a decline in airfares. And it could happen. But all this really does is move fares back in line with the current jet fuel (yellow triangle, if NSA fares were unchanged).

FWIW, there is no strong seasonal adjustment from Oct to Nov in airfares. They tend to drop in December, but that shouldn’t be in this report.
Previously, I’d been assuming a boost from airfares moving back in the direction of the trendline. That hasn’t happened. If again the dots move just parallel to the line, the jet fuel drop implies about a -3.3% decline in airfares, which is worth 2.5bps on core.
So if we get a low number like that, the first place I’m looking is shelter (just because it’s big); the second place is airfares.
Obviously we’re still going to watch shelter. OER was +0.41% m/m and Primary Rents +0.50% last month. I expect both of those to be lower. On the other hand, Lodging Away from Home should swing in the other direction, so shelter overall should be similar to last month.
Fair disclosure that my Primary Rents model starts to drop fairly rapidly now, so if I take the number naively then I’d be penciling in 0.32% m/m for Primary Rents. That would be much lower than anything we’ve seen m/m yet. And, anecdotally, I don’t see that yet.
Finally – my headline ‘forecast’ is higher than others’. And that’s because of piped gas, and because I don’t get fired if I miss. Natural Gas spiked in October; given usual lags that SHOULD mean ‘Piped Gas’ is higher this month.
That would add 7bps, while gasoline drags about 22bps. But subsequent to that, Nat Gas has dropped sharply. And I don’t think most people want to forecast HIGHER gas and try to catch the zig-zag. Safer to just forecast flat.
If it’s flat, then my headline is exactly in line w/ CPI swaps: -0.21% m/m NSA, +0.10% SA headline. But if I’m taking the mechanical drag from gasoline then I’m taking the mechanical bump from Natty. (Although to be fair, gasoline passes into CPI directly and Natty doesn’t.)
Turning to markets. Market movements this month are all lower, as the massive bond rally can be seen in real rates and in breakevens.

Let’s not lose sight of the fact that the monetary metrics are continued good news. M2 is still negative y/y and q/q. And bank loan growth is also very soft (a lot of that is mortgages though).

Now, you can kinda think of the ‘potential energy’ as the amount the line moved above some trend…say 5%, 6% money growth or loan growth…and it needs to ‘absorb’ that by being below by a certain amount (or the price level will be permanently higher, which is likely the case).
How long can money growth be below 0? I’ve already been surprised! But if the market is right about the substantial Fed easing in 2024, then money growth will not stay low enough, for long enough, to get inflation back to where everyone wants it.
OK, bottom line is that everyone is forecasting a SOFT 0.3% on core, meaning that it will round up and barely keep y/y rounding to 4.0%. If shelter comes in soft or airfares moves with jet fuel, it will be a downside surprise.
But stocks are already on the roof and bonds are 75bps off the high yields. I am not sure an 0.23% or 0.24% on core will be greeted with a tremendous market rally. But 0.31%…or heaven forbid an 0.34% that turns Core CPI up a tick? That would be ugly.
Ergo I think a downside surprise is the bigger chance, but the smaller effect. I’d sell the initial pop. An upside surprise: I wouldn’t try to catch the knife. Especially in illiquid year-end conditions.
So that’s a wrap. Good luck today, and thanks again for your persistent support!

Humorously, it looks like Twitter changed its authorization hooks again. So the auto chart will be manual again. Wish it could have been smooth for this last month! I’ll do it pretty quickly though.
Well, +0.097% on SA headline, and +0.285% on SA Core. Higher than expectations, but not by much.
Immediately jumping out is OER at +0.50%, higher than last month’s +0.41%. Primary Rents +0.48%, down slightly from last month but still wayy above my model. And my model is higher than what the Street has, which has been projecting deflation next year in rents.
Used Cars was in fact an add. +1.58%, despite a 4% fall in (NSA) retail prices. The BLS seasonals just don’t have that much of a drop off, so it must be that some other survey was showing higher retail used car prices.

Some charts in a minute. BLS blocked everything for a bit.

Airfares was -0.39%; recall I’d assumed flat despite a large decline in jet fuel. Feel good about that one. But Lodging Away from Home was -0.9% m/m.
Last 12 Core CPI. The downside momentum is less evident now.

Major subgroups. I will come back to this. Medical Care was an outlier compared to recent trends. Doctors’ Services rose more than 1% m/m. As I said I’ll come back to that.

Core goods inflation got to 0, but core services inflation stayed at 5.1% y/y. I continue to think core goods inflation is just about done declining, but Used Cars keeps pulling it slowly lower.

OER and Primary rents. Yes, they’re decelerating. But wayyyyyyyy less than people expected. 0.50% on OER m/m, and 0.48% on Primary Rents. Lodging Away from Home was the only drag on shelter.

Some ‘COVID’ Categories:

Airfares -0.39% M/M (-0.91% Last)

Lodging Away from Home -0.93% M/M (-2.45% Last)

Used Cars/Trucks 1.58% M/M (-0.8% Last)

New Cars/Trucks -0.06% M/M (-0.09% Last)

My early guess on Median CPI is a rise to +0.434%, above 0.4%. As with core, the downside momentum here isn’t clear any more. Leveling out in the mid 0.3s gets us 4.25% or so y/y. Not good enough.

Piece 1: Food and energy was a bit of a drag. HOWEVER, Piped Gas was +4.05% m/m, which added 0.04% to headline inflation – that’s the main source of the headline miss. I should note, I pointed this out…overall, Energy was a -0.23% drag.

Piece 2: core goods, back to flat.

Piece 3: the most disturbing piece, because it’s ‘supercore’ and now hooking higher. This is medical and I’ll come back to it.

Piece 4 rent of shelter. A loooooooong way to go before deflation!

Food was +0.22% m/m (SA), after +0.30% last month. Food at home was softer thanks to declining shipping, packaging, and commodities costs: +0.11% SA m/m vs 0.26% last. Food Away from Home remains bubbly thanks to wages: +0.43% SA m/m vs +0.37% last.
Doctors’ services jumped 0.55% m/m. Y/y, it’s still -0.7%, but this jump contributed to the surprise in core and in ‘supercore’. It’s mostly a payback for the -1% surprise plunge last month.

Medicinal Drugs was +0.45% m/m vs 0.6% prior. But Prescription Drugs jumped to 3.77% y/y. Have no fear: the Biden Administration just threatened to seize patents for any drug increasing prices too much. https://inflationguy.blog/2023/12/07/beware-the-price-controller/

Core inflation ex-housing rose to 2.13% y/y, the first sequential acceleration since March. Not alarming at 2.13%, but prior to COVID this was in the low 1s.
Biggest m/m declines were Mens/Boys Apparel (-26% annualized), Car/Truck Rental (-24%), Infants/Toddlers Apparel (-15%), Womens/Girls Apparel (-13%), Motor Vehicle Fees (-13%), and Lodging Away from Home (-11%). The Apparel decline is seasonal holiday discounting.
Biggest annualized m/m core increases: Used Cars & Trucks (+21%), Tobacco & Smoking Products (+15%), Public Transportation (+13%), and Motor Vehicle Insurance (+12%).
I love it when a plan comes together.

Glancing at the markets, I must say I haven’t the slightest idea why we rallied hard in both stocks and bonds on this data. This is not bullish data.
Have to point out the inflation swap market nailed the headline figure. You can’t trade core in size, but the Kalshi market going in had it at +0.32%. That always seemed high to me.
Overall, this was fairly close to expectations but the fact that it was shelter holding it up – which is why Median was high, also – is bad news. The entire mainstream thesis on inflation going back to target DEPENDS on something close to deflation in housing.
…well, deflation in housing OR calamity elsewhere in services. Thanks to the lags in housing, core inflation is going to drip somewhat lower, but it won’t get below 3% before it is hooking higher UNLESS housing really does belly flop. No sign of that at all.
I guess the counterargument is “but it’s ONLY housing holding it up.” That’s not really true, though. Actually the far left tail of goods in deflation is getting bigger – but that’s the short-cycle stuff (e.g. core goods) that will rotate back up. Services, housing still high.

I shouldn’t obscure the good news, which is that the breadth of inflation is narrowing. And the decline in the monetary aggregates is promising. The problem is that we have just SO FAR TO GO and the market anyway is expecting the Fed to take its eye off the ball.

In conclusion – yes, Virginia, this IS the hard part. Core and Median will drip lower thanks to shelter. That takes us from 4% to what, 3-3.25% in 2024 – before shelter’s disinflation is complete. Then what?
I continue to expect inflation to settle in the high 3s, low 4s, although continued decline in the aggregates will have me push that a little lower. Maybe we’re mid-3s to high-3s in the medium term now, with cycle bottom around 3%. Is that good enough? Doesn’t feel like it.
That’s all for today. And all for @InflGuyPlus! Thanks again for subscribing to this channel. Be sure to subscribe to the blog at https://inflationguy.blog and follow the podcast at https://inflationguy.podbean.com or your favorite podcast app – so we’ll stay in touch. Merry Christmas!

This number was a little bit above expectations, led by shelter, Used Cars, and Physicians’ Services. There weren’t a lot of large surprises (Physicians’ Services was an unexpected jump but last month it had an unexpected decline so this is best viewed as a give-back), which helps explain the relatively placid market response. Ultimately, how you feel about inflation these days comes mostly down to shelter although it is worth pointing out that ‘super core’ (core services ex-rent of shelter) hooked slightly higher too.

To get inflation back to target in 2024, we would need one or more of the following to happen:

Shelter inflation indeed goes negative, as the mainstream forecast expects (but I do not – I believe rents will level off around 3% y/y and then likely rise from there); or
Core goods goes into hard deflation, of -2%ish. With Used Cars already having given up 17% or so off its highs, it is unlikely to be the driver of that. Apparel? Medicinal Drugs? (chart below shows the striking relationship between the growth in M2 since the end of 2019 and the contour of Used Car prices – driving home again how important a continued decline in the money supply is, if we want inflation to get tame again); or

Core Services ex-Shelter decelerates markedly. For that to happen, we’d probably need to see wages decelerate a lot more. The chart below shows the Atlanta Fed wages measure (y/y) in black, and ‘supercore’ as Bloomberg calculates it in blue. If you want Supercore down to 2%, then you probably need wages at 3-4%. We have a long ways to go there.

To repeat my recent theme: while the inflation numbers are better, and will keep getting better for a while in 2024 because of easy comps and positive trends, we are into ‘the hard part.’ The current trends do not point to inflation placidly returning to 2-2.25% in 2024, or in 2025 unless the money supply continues to shrink.

And that’s where we run into the issue. The market is pricing in something like 125bps of eases over the course of 2024. While it’s possible that the Fed could cut rates while continuing to shrink the balance sheet (since the Fed funds rate is now just stated, rather than being managed through pressure on reserve balances), it would be very odd for the Fed to do something that looks like easing with one hand and tightening with the other. They’d come under a tremendous amount of criticism for that. While that’s actually my recommended strategy for them, I don’t give it much chance of happening.

So, if that’s not going to happen, then one of two things is going to happen:

The Fed eases in 2024, and ceases shrinking the balance sheet. This is great for the bond market in the short term, but it would mean inflation probably wouldn’t even get back to 3% on core before re-accelerating. And no one will be able to blame the next increase (probably not a spike) on COVID.
The Fed does not ease in 2024, in which case at some point the bond and stock markets are going to have to stop pricing loose money. That would of course be very bad for stocks and bonds.

There aren’t any easy ways out. Yes, that’s what “this is the hard part” means!

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

Summary of My Post-CPI Tweets (Oct 2023)

November 14, 2023 Michael Ashton 3 comments

Welcome to the #CPI #inflation walkup for November (October’s figure). This is the next-to-last month I will be doing this!
If you miss the live tweets, you can find a summary later at https://inflationguy.blog and I will podcast a summary at inflationguy.podbean.com . Those will continue in 2024 after the live tweeting stops.
Well, this report ought to be interesting. My forecasts are very different from the other forecasts out there. The Bloomberg consensus has +0.09% on SA headline, and 0.30% on core. The swap market, Kalshi, and Cleveland Fed are all in the same ballpark.

I have 0.14% NSA, roughly 0.22% on headline, and 0.38% on core.
It is a little wild to me that everyone else is so low, and it makes me concerned that I’m missing something. But I think it comes down to the fact that everyone must be expecting a big give-back on OER this month.
Used car prices should add this month. Health care insurance pivots from an 0.04% drag to an 0.02% add. Even airfares could rise, despite sliding jet fuel, because fares are too low given the level of fuel.
All of those are in my forecast (well, I conceded flat on airfares but it could go either way). I assume they’re in everyone’s forecast. So that leads me to believe that the assumption is a correction in OER is in store.
OK, I see the chart too. It sure LOOKS like OER did something weird last month. If OER prints 0.45% m/m instead of 0.55%, then that takes 2.5bps off my forecast. That still doesn’t get there. You need an 0.35% or something.

And oh by the way, I’d argue that the jump might just be payback for a too-rapid fall that happened earlier this year. There was no reason to expect monthlies to drop from 0.7% m/m in Feb to 0.48% in March. Rents are not collapsing and home prices are now going back up.
I know that’s inconvenient to the deflation story but it’s right on par with where my model says it should be. (Our model is Primary Rents but OER is based on rents).

So okay, I’ll drop my forecast 2.5bps on the assumption we go back to 0.45% m/m for OER. Now ya happy?!? But I’m not assuming any ‘payback’.

Meanwhile, I haven’t even talked about the fact that I have +1% on Used Cars, but that might be too conservative given how strong auctions were in the latter part of September (not picked up in the last number).
And I don’t have anything for New Cars – but thanks to the new wage agreement, car prices both New and Used are going to go up again.
I’ve already spoken plenty about the reversal in Health Insurance; it shouldn’t take anyone by surprise this year.
The change in method means that the shift from -0.04% to +0.02% per month should only last six months – it shortens the lag but this transition period increases the effect to synchronize.
With all this, Core CPI should stay at 4.1% y/y, or rise (if my forecast is on point). As I said last month, getting it below 4% is going to be more of a challenge. And Median inflation will fall to probably around 5.25% this month, but again we’re in the hard part now.
Breakevens have net slumped a bit this month, but that hides the fact that after last month’s CPI they spiked for a week or so. 10y breaks got to 2.50% in the bond market selloff before settling back.

If the bond bear market continues (and the balance of large government budget deficits, smaller trade deficits, and a Fed in run-off means more pressure on rates to attract domestic savers), breakevens will go back up.
Not sure that’s a good play in Q4, since this tends to be a good seasonal time for bonds, but a bad CPI could change that. And, naturally, with a recession coming (we think?) it’ll be harder to get higher rates immediately.
However…the secular bull market in bonds is over so the real question is whether interest rates are aimless for a decade, or in a secular bear market. Too long a topic for a tweet storm!
So that’s it for the walkup. Pretty simple task today: 1. check OER, 2. check core ex-housing, 3. check core services ex-housing (“supercore” for a finer read on the Fed (?))
Keep checking the improving distribution of inflation – core below median means the tails are moving to the downside, in a disinflationary signature, but not sure that will outlast 2024.
Good luck!

Very soft number! Let’s see how much of this is ‘payback.’
If it’s CPI day there must be I.T. issues. It’s a law. Headline was +0.045%, Core +0.227%. Used cars was a DRAG, which is completely at odds with surveys. OER dropped to 0.41% m/m, but that by itself wouldn’t be enough for the downside surprise.
Airfares fell, Lodging away from home fell significantly, New Cars was a marginal decline…and health insurance didn’t add as much as it was supposed to (not sure why) although it was positive. Looks like a well-rounded soft number.
Here is m/m OER. Back to prior level, but no payback.

In the big picture, the 3-month average isn’t all that soothing, especially when we look at Used Cars and other quirks that will likely be repaid.

So Black Book was -1.85% in September, NSA CPI Used Cars was -5.63%. BB was +1.07% in October, NSA CPI Used Cars was -1.40%. Private auctions were strong. This is confounding – might be a seasonal quirk that BLS reflects different seasonals, but the NSA pretty far off.
m/m CPI: 0.0449% m/m Core CPI: 0.227%
Last 12 core CPI figures

M/M, Y/Y, and prior Y/Y for 8 major subgroups

Primary Rents: 7.18% y/y OER: 6.85% y/y

Further: Primary Rents 0.5% M/M, 7.18% Y/Y (7.41% last) OER 0.41% M/M, 6.85% Y/Y (7.08% last) Lodging Away From Home -2.5% M/M, 1.2% Y/Y (7.3% last)
Some ‘COVID’ Categories: Airfares -0.91% M/M (0.28% Last) Lodging Away from Home -2.45% M/M (3.65% Last) Used Cars/Trucks -0.8% M/M (-2.53% Last) New Cars/Trucks -0.09% M/M (0.3% Last)
Here is my early and automated guess at Median CPI for this month: 0.359%

Now, this is really the important thing. Median is still 0.36%. That tells you this is left-tail stuff more than the rents stuff.
Piece 1: Food & Energy: 0.17% y/y

Food at Home was +0.26% SA; Food Away from Home +0.37%. Food added 0.04% to headline, which was right on my forecast. Look, talk to any restaurateur – wages are still a big problem. Food AFH isn’t going to deflate soon.
Energy was -0.22% m/m NSA; I’d estimated -0.17% so it was very slightly more drag.
Piece 2: Core Commodities: 0.0948% y/y

Piece 3: Core Services less Rent of Shelter: 3.71% y/y

Piece 4: Rent of Shelter: 6.76% y/y

Core Goods: 0.0948% y/y Core Services: 5.5% y/y

Core goods actually ticked up slightly. Despite the decline in Used and New cars.
This is part of the core goods story – continued acceleration in Medicinal Drugs. Honestly this is something we’ve been expecting for a long time and just surprised how long it has taken. Many of the APIs for pharma come from China.

Core ex-housing actually ticked up very slightly from 1.97% y/y to 2.05% y/y. That sounds great but prior to COVID it hadn’t been above 2% since 2012 so that’s still too high.
Largest declines (annualized m/m) in core were Lodging Away From Home (which is quite surprising) at -26% and Car and Truck Rental (also surprising) at -17%. Both core services but only the latter is “supercore”.
Largest advances Motor Vehicle Insurance +26%, Tobacco +25%, Jewelry and Watches +16%.
I am probably not going to be exactly right on median because in my calculation the median category is Northeast Urban OER, which means we’re relying on my ad-hoc seasonal adjustment. Could be as low as 0.32% m/m, or a smidge higher. Either way, it’s not price stability.
I guess on Health Insurance I’ll have to leave the explanation to someone with a pointier pencil. My calculations had the effect being about 2bps/month; this month is was about 0.8bps. I would call that negligible except that previously it had been a 4bps drag.
Our housing model, updated with the latest data. Kinda right on par. But notice our model never gets anywhere close to deflation in housing. Those calling for such are going to be disappointed.

This is a strange dichotomy and I wonder if some physician can explain it. Maybe doctors are making their money by channeling expensive services through hospitals. But it’s weird to see hospital inflation so buoyant while doctors’ services are deflating.

Education and Communication was a little soft. Some of that was a curious (to me) -0.24% NSA m/m decline in College tuition and fees. Probably a quirk. Also Telephone hardware was -1.9% m/m.
Apparel was soft – partly this is expected because of the lagged strength of the dollar on core goods, but the -5.1% decline in Women’s outerwear seems unusual.
The EI Inflation Diffusion Index is back almost to flat. Note that doesn’t mean 0 inflation. To get back to persistently having Median CPI around 2-3%, you’d want to see the diffusion index quite a bit negative. I think that’s going to be difficult.

Last chart, and it tells the story. Left tail is growing, but rest of the distribution is moving left only reluctantly. The big fingers on the right are housing. It’s encouraging that there is more diversity here – a sign that the money impulse that affects everything is waning.

Here is today’s summary. Core was surprisingly tame but it was largely from some quirky one-offs. Median didn’t improve very much. Neither Core nor Median over the last 3 months is where the Fed wants it. This doesn’t change, therefore, the higher-for-longer meme.
It also doesn’t demand further tightening, but that’s not news. We already knew the Fed was done.
Looking ahead, there will be further slow progress on housing, although as I keep saying – not as much as some forecasters think. The problem is that outside of housing, core inflation doesn’t look like it wants to fall much further.
Naturally all of this depends on what the Fed does going forward. If the money supply keeps bumping along around zero growth, then eventually the velocity rebound will run its course and inflation will go back to 2-3%.
But higher rates mean that velocity is probably going to do more than just rebound, so higher for longer will need to be longer than people expect – or, possibly, than the Fed can maintain in the face of recession.
That’s the hard part. This so far has been the easy part. If market rates rise again in sloppy fashion after the new year, despite recession signs…what does the Fed do? Inflation won’t be at target yet, or even close. Stay tuned!
…and thanks for staying tuned. Have a good day.

The CPI was a happy surprise today, but not so much that I would throw a party. The low miss was partly caused by inexplicable declines in autos and lodging away from home, while the correction in rents basically just went back to the prior level rather than stepping down to a slower pace. Rents are still going to come down, and in some places in the country they are falling – but in some places they are still rising briskly.

That dispersion in experienced rental inflation is actually part of the good news, and it’s good news that we see throughout the CPI over the last several months. It’s the good news that the Enduring Investments Inflation Diffusion Index is capturing: all prices are not moving as one, as they mostly did during the upswing in inflation. A high correlation between unrelated categories tends to suggest a common impulse is causing the movement – and is yet another reason that the notion that inflation was coming from various idiosyncratic supply chain issues should never have been entertained. There was clearly a large impulse acting on all prices: the 20%+ spike in money growth. Now that the money supply is flat, though velocity is rebounding, price dispersion is reasserting.

(Spoiler alert: it isn’t yet happening on the inter-country experience – all countries saw their inflation move in synchrony when it went up, and all are seeing it move in synchrony coming down, so it’s early to say the battle is won.)

We’re still just starting the difficult part, from the standpoint of monetary policy but also from the standpoint of figuring out how quickly inflation can get tamped back down to target. And the dispersion makes that more difficult, because the signal gets lost in the noise – just as it used to, before the money gusher. Next month we’ll have to deal with likely rebounds in Lodging Away from Home as well as increases in autos, reversing this month’s surprises, but we’ll probably get slightly better rent numbers.

What I can say is that the market reaction to all of this is absurd. This just doesn’t move the needle on the Fed. There was no tightening and no easing in the pipeline before this number, and after this number that hasn’t changed an iota. But at this hour stocks are +2% and bonds are soaring. I know the conventional wisdom is that rates are going back to zero…it just seems kind of early to get on that train when median inflation is still 5.3%…

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

Summary of My Post-CPI Tweets (August 2023)

September 13, 2023 Michael Ashton 2 comments

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

Welcome to the #CPI #inflation walkup for September (August’s figure).
At 8:30ET, when the data drops, I will pull down the data and then run a bunch of charts. I think I’ve figured out how to autopost these again, fingers crossed. Then I’ll comment and post some more charts.
Later, I will post a summary of these tweets at https://inflationguy.blog and then podcast a summary at inflationguy.podbean.com . Thanks again for subscribing!
This month, after some low prints recently, we’re going to get some higher ones. Not terrible like last year, mind you, but higher. The economist consensus…which I’m again closer to than the swap market estimate…is for a high 0.2% on core and a low 0.6% on headline.

That will raise y/y headline and drop y/y core (all the way to 4.3%!). Core should also fall again next month due to a harsh comp from Sep 2022. After that, progress will be slower. If there’s progress.
The last couple of prints have been very low: core of +0.16% in both June and July. These were due to non-repeatable things, and I’ll talk about some of them in a bit.
But the point is that we’ve gotten most of the positive surprises for a while I think (although I guess that’s the nature of surprises!)
A positive (drag) today, and ongoing for a while, will be the deceleration in rents. Last month Primary Rents were +0.42% and OER was +0.49%. I am penciling the combined ‘rent of shelter’ in for +0.41% this month. That might be aggressive. But it will keep slowing for a while.
But there are a few things that are going to be reversing soon. One is health insurance. I wrote about this recently https://shorturl.at/agtCX . It will still drag today but that will reverse in October.
Used Cars is a little indeterminate. I would have thought it was overdone on the downside but am less sure of that now. Here’s why:
Black book implies continued downward pressure on used car prices. This is partly because auto finance companies have really jerked back on lending, sharply raising rates along with their cost of funding and actually checking credit occasionally.
The rates make sense but the rationing not so much – delinquency rates have risen from the 2021 covid-funding inspired lows but are still at normal rates. Anyway the result has been downard pressure on used car prices.

The rate effect is what people had been expecting from housing – the difference between a 5% car loan and a 0% car loan for 7 years is about 13% higher cost for the non-cash buyer so a budget-conscious buyer lowers his price somewhat as a result. Hasn’t happened in housing.
But in housing the seller also has a loan with value and so is reluctant to sell at a lower price AND lose the low rate. That symmetry doesn’t exist in autos. I suspect that’s why used car prices have fallen farther than I expected (and I should have seen that).
The Fed though is done (at worse, ALMOST done), and rates will level off for car loans. So this downward pressure will eventually ebb. And they should end up adjusting to a higher overall price level.
Used cars will still be a drag today (I have a -3.5% fall in used cars penciled in), but that too should ebb soon.
The real mystery from last month was airfares. That has been down >8% two months in a row, and the current level is about 15% too low for the level of jet fuel (which is rising).

Do airfares recover 3%? 8%? 15%? I’m wild-guessing 6% but every 1% is worth 3/4 of 1bp on the core m/m. So I’m projecting it to add 4bps, basically. This is a big source of uncertainty, but mostly on the upside, this month.
Now, we should also recognize that last month’s CPI was also pretty BROADLY low, which meant that median CPI also printed low.
That would be wonderful if it happened again (but it’s unlikely). Indeed, between higher headline, core, and median, it will be very easy for some people to get carried away with negativity.
But still, we’re talk ing about 0.23% on core, maybe rounding up to 0.3% if we get stuff a little high. That’s settling in towards the high-3s, low-4s, which is where I think we are going. But watch the breadth, and median.
The markets, on net, have done almost nothing this last month. Real yields and nominal yields went up a touch, but longer breakevens and swaps are almost exactly unchanged. Shorter breakevens are wider on the strength in gasoline.

I think markets recognize that the narrative is turning, from “we are in an inflationary spiral” to “inflation is coming down” to “okay now it gets harder.” And that leaves breakevens a bit aimless for now.
I do think breakevens are too low!
Energy is back rising, and this time there’s nothing left in the SPR to hold down gasoline prices. Government deficits are ballooning again, partly because interest costs are skyrocketing.
Navigation from here, both macroeconomically and in a trading sense, starts to get difficult again. Good luck out there today!

A bit on the high side. Core 0.278 to three decimals. Working on downloading data now.
As I said, core was a little higher than expected, but still at the low end of what we’d seen for the prior year.

CPI for Used Cars and Trucks was -1.23%, less than I expected. Airfares were +4.89% (I had +6%), so in the ballpark.
M/M, Y/Y, and prior Y/Y for 8 major subgroups

Core Goods: 0.234% y/y Core Services: 5.9% y/y

Primary Rents: 7.76% y/y OER: 7.32% y/y

Further: Primary Rents 0.48% M/M, 7.76% Y/Y (8.03% last) OER 0.38% M/M, 7.32% Y/Y (7.66% last) Lodging Away From Home -3% M/M, 3% Y/Y (6% last)
Some ‘COVID’ Categories: Airfares 4.89% M/M (-8.09% Last) Lodging Away from Home -2.97% M/M (-0.34% Last) Used Cars/Trucks -1.23% M/M (-1.34% Last) New Cars/Trucks 0.27% M/M (-0.08% Last)
A little surprising that we aren’t seeing the same effect on New Cars (loan interest rate effect) that we are on used cars.
Here is my early and automated guess at Median CPI for this month: 0.328%

OK, this is what I expected. The broad everything-was-soft month was a one-off. Median is still slowwwwwly decelerating, but not collapsing like it appeared.
Piece 1: Food & Energy: 1% y/y

The energy story is known – OPEC is cutting supplies in anticipation of weak growth, but so far the main economic driver globally (the US) isn’t having the weak growth. And supplies are low. So headline was bubbly and will probably get more of that next month.
Piece 2: Core Commodities: 0.234% y/y

Core Commodities driven lower this month partly by Used Cars of course. But it’s going to be challenging to push it a lot lower. That said, the strength of the USD is putting constant pressure in the traditional way here – but nearshoring is still going to make this sticky.
Piece 3: Core Services less Rent of Shelter: 3.88% y/y

This is a little interesting…it’s just a little hook to the upside, but remember one of the big downward pressures here is Health Insurance and that’s due to reverse soon.
But the other big input is wages, and labor’s recent muscularity along with increases in minimum wage in California is going to keep this from decelerating as much as it ‘needs’ to.
Piece 4: Rent of Shelter: 7.33% y/y

This is going to keep decelerating. But not back to zero!
I had penciled in Rent of Shelter as +0.41%. OER slowed to +0.38% m/m, while Primary Rents (about 1/3 of the impact) was faster this month at +0.49%. But ‘Lodging Away from Home’ dropped about 3%, and that’s why Rent of Shelter was so soft. This should rebound next month.

Interesting and important dichotomy continues: Food at Home was +0.09% (NSA); Food Away from Home was +0.34% (NSA). The latter is wages. Keep an eye on that.
Medicinal Drugs was +0.61%m/m. Series obviously bounces around a lot but to my eye it’s creeping higher. I remember in 2020 and 2021 it was confounding that with COVID, there was downward pressure here. Looks like that’s ebbed.

Doctors’ Services was +0.11% m/m, and remains sort of soft. But Hospital Services (2.3% of CPI) was +0.67% m/m. It had been one of the soft categories last month at -0.44%.
Lodging Away from Home, as I’d mentioned, dragged down the overall Rent of Shelter. But it’s at the low end of its monthly range of wiggles and will probably add next month rather than subtract.

Worth pointing out because it’s been in the news. Motor Vehicle Insurance, which is 1.7% of CPI – has been steadily increasing. Causes are higher car prices, and big increases in carjackings as well as some natural disaster losses. This doesn’t look like it’s going away. (charts show m/m and y/y)

Core ex-housing is down to 2.36% y/y. This sounds low, but prior to COVID it hadn’t been over 2% since 2012. As noted earlier, core goods has squeezed out most good news already and core services – outside of housing – still faces wages growing faster than 5%.
The biggest-losers list (annualized monthly figures) among core categories is led by Lodging Away from Home (-30%), Misc Personal Goods (-25%), Infants/Toddlers’ Apparel (-20%), and Used Cars/Trucks (-14%).
Biggest gainers are Public Transportation (+58%), Motor Vehicle Insurance (+33%), Car/Truck Rental (+17%), Footwear (+15%), Car Maintenance/Repair (+14%), Misc Personal Services (+12%).
The dispersion stuff is actually decent news. Broadly, things are slowing down. That doesn’t mean we are going back to 2% inflation; in fact there are very few signs of that yet. But it does mean that the broad upthrust in the price level is ebbing.

It would be nice to go back to worrying mainly about relative price changes instead of absolute price-level changes. We aren’t there yet. The volatility of prices, and some of the broad pressures like trade and wages, remind us that we are still in the inflation episode.
This only FEELS like inflation is low, because we saw what high feels like. But 4% core/median inflation is no picnic. And it will keep correlations elevated.
Last chart. Here is the weight of categories inflating faster than 4%. Obviously we are getting close to 4% being the median. Now, about a third of the basket is housing so that third is in the >4% category. But if we flip and look at <2%, it’s still not back to the old normal.

…implication being the same as with the diffusion index, volatility, and correlations – we are on the right path, but not there yet.
NOW – that does NOT mean that the Fed needs to keep raising rates. That’s fairly ineffective anyway although it looks meaningful in used cars. That’s not the issue though. What the Fed should, and probably will do, is just keep rates steady here. And I think they will.
The real problem comes later: with burgeoning deficits and upward pressure on long rates (I worried about this here: https://inflationguy.blog/2023/08/02/three-colliding-macro-trends/ ), at some point the Fed is going to be under pressure to start buying Treasuries again.
That’s a bad path, but it’s going to be hard to resist.
That’s all for today. Thanks for tuning in! I’ll have the summary posted to the blog in an hour or two, and then the podcast later today. Have a good day.

The CPI number this month delivered broadly as expected (and, as expected, broadly). Used Cars continued to slide, and airfares did not repeat the -8% again. The surprise drop in Lodging Away from Home will likely reverse next month, and airfares will be another add. While Used Cars will remain soggy, we only have one more month of Health Insurance drag of 4bps/month before that reverses.

The upshot is that the balance of this year will likely see more 0.3s for the most part, with some high 0.2s (meaning that it rounds down). The easy lifting on core has been done. Due to base effects core will still drop next month, but after that…it is going to get difficult. Decelerating housing inflation will be a persistent following wind, but all of the other things that were rowing in one direction while housing was rising…are about to be rowing in the other direction. And housing’s drag is already reversing. (If you were looking 12 months ahead at the possible future declines in rents, to be fair you should be looking now at 12 months ahead when we’re going to start to see percolating through the re-acceleration that we’re seeing in spot rents and home prices.

There is no need for the Fed to tighten further. Rate hikes don’t really help very much (except in some categories like used cars!) to restrain inflation, and short rates are a bit above normal. But as noted in the tweet stream, we are converging on what will be a more difficult path to navigate. The Fed made a mistake and overdid the COVID response, and then held it too long. It deserves credit, on the other hand, for pivoting and throwing off the dovish history of the last two decades to begin shrinking the balance sheet and for being steady on that path even as the rate hikes cease. But those were, or should have been, easy decisions from the monetary policy standpoint as the central bank was leaning into the prevailing wind by pursuing restraint when the economy was robust.

Before too long, the Fed is going to face a circumstance where restraint remains necessary because inflation is sticky at too high a level, but longer-term interest rates begin to tick higher. This will put pressure on economic growth, and on the budget deficit, so that their restraint will be seen as wrong-headed. That’s the danger zone, and I think it probably is a 2024 problem. My fear is that it will be very difficult for the Fed to not give in, arguing to itself that “hey, slower growth means lower inflation” even though there’s no evidence for that, outside of energy, and start to temper its hawkish stance.

That would be a big mistake. But it’s probably next year’s mistake. For now, we can sit back and watch the core and median inflation numbers come down. Not as fast as people will be expecting, but the direction is right.

Categories: CPI, Tweet Summary Tags: core cpi, core inflation, CPI, inflation, interest rates

Summary of My Post-CPI Tweets (July 2023)

August 10, 2023 Michael Ashton 2 comments

Welcome to the #CPI #inflation walkup for August (July’s figure).
At 8:30ET, when the data drops, I will run a bunch of charts. Because Twitter has made auto-posting them difficult /impossible, I’ll post those charts manually with commentary as I go. Then I’ll run some other charts.
Later, I will post a summary of these tweets at https://inflationguy.blog and then podcast a summary at https://inflationguy.podbean.com. Thanks again for subscribing!
Get ready: today will be a low number, and good news. But it’s about as good as the news is going to get. Y/y core will decline again next month, but the monthlies won’t keep improving.

This month, the forecasts get a large drag from Used Cars. And in fact, Used Cars creates downside risk to these numbers – it has surprised significantly on the high side for multiple months. If there’s payback, it could be a LARGE miss.
The y/y figures for used cars have been in line with y/y figures from Black Book, so it’s possible that the recent misses have just been because of some odd seasonal quirk.
If so, then no payback is necessary and we’ll get something like -2.5% (my forecast), plus or minus a couple of tenths. (That’s somewhat joking since this series is very volatile).
I actually wrote a column (on the blog) about the volatility of these various series. While everyone thinks inflation is going to drop swiftly back to earth, the volatility of the numbers hasn’t done so. And that’s a tell.
This is rolling 12-month volatility on used car CPI. The picture looks similar for lots of subcategories.

The basic idea is that if everything was returning to normal in terms of the trend inflation level and the placid behavior of it…then we’d also see the VOLATILITY of inflation plunging back to normal. Not yet.
Looking back at those forecasts, I should point out that I’m again (and annoyingly) right about where the consensus of economists is. Kalshi is lower, though it has been trending higher. Again, I do think there is downside risk to this figure.
OER and Primary rents I have penciled in at +0.43%, sequentially slower from +0.45% last month. There is further slowdown coming, but we aren’t going to zero as NTRR and other models are predicting.
I really like our new model, which is not just functionally a lag of property prices (which drives most models) or a straight lag of less-accurate (but current) rent figures. I write about the model in this quarter’s Quarterly Inflation Outlook (due out Monday).

Because a lot of the drag this month is going to be from Used Cars, and we collectively feel pretty confident about that, it’s going to be critical to look at Median. Last month it was 0.36%, and the last several have been much better than those from the prior year.
So again, all of this is good news. But we are using up a lot of the good news, and while everyone will extrapolate today’s CPI if it’s good news be careful about that.
This month will also gets flattered on the headline from declines in piped gas, and the rise in gasoline won’t hit until next month. Oh, and gas is rebounding too.
In the big picture, ‘supercore’ (core services less rents) is still the main category of interest, knowing though that it’s dampened by Health Insurance.
Along those lines…the large rise in UPS compensation is emblematic of the new muscle of labor and a reminder that the wage-supercore feedback loop is still operating.
Again, don’t get too excited by today’s good news! The big picture is: money stock contacting, but money velocity recovering (fastest 3q rise ever). Core goods down and dollar strong.
But government deficits are rising again, partly because interest costs are skyrocketing. This federal dissaving isn’t seeing offsetting domestic (or international) saving. So expect more pressure on interest rates. And it sets up a future dilemma for the Fed.
We aren’t out of the woods yet. I think inflation is going to ebb to the high 3s/low 4s on median CPI, but then get pretty sticky. And the next upthrust in inflation will start from a much higher level than before.
But that’s all far away. In the meantime, inflation markets have been relatively calm with breakevens up a little bit over the last month and real yields hovering just below 2%.

It would be a great place to have the market find balance, around long-term fair value on real yields. But…inflation volatility suggests it’s far too early to declare victory on inflation for all time.
Good luck out there!

OK, 0.167% on core. Numbers still coming in, waiting to see how much was Used Cars. Rents were behaved.
Sorry, that was 0.160% on core. 0.167% was SA headline.
Used cars was -1.34% m/m, so about half of what I expected and the general consensus. So what dragged?
Charts will follow in a few. OER was +0.49%, a bit higher than I expected; Primary rents +0.42%. Lodging Away from Home -0.34%.
Wow, another huge drop from airfares. Remember last month’s -8.11% drop was almost unprecedented? Well, we got a second month of the same. That seems implausible. Not sure what’s happening there!
Core goods, thanks to Used Cars mainly, dropped to +0.80% y/y. Core services is still high, but fell from +6.2% to +6.1% y/y.
The diffusion things will look interesting. Of the 8 major subcategories, Housing was +0.35% m/m but no other category was higher than +0.23% m/m (and that was food). Next highest was recreation at +0.12%.
Not my normal first chart but here is y/y CPI for pharma. It was +0.58% m/m.

OK folks – here’s m/m core CPI. As I said, don’t get used to this low level. But it sure LOOKS like we’ve gone back exactly to 2% and stuck the landing!

Here are the 8 major subgroups I mentioned. Very tame m/m.

Now THIS is the big chart. This is Median CPI. I want to look at the subcomponents – Other Food at Home was the median category. This is the best news in the report.

Here is the rent chart. Our model has them going to ~3% over the next year. Unless core goods keeps dropping (which means the dollar continues to rally) it’ll be hard to get inflation back to 2% if housing is at 3%. Only reason it happened before was core goods deflation.

To that point, core goods needs to go negative if you want to get back to 2%. And I think even then it’s difficult unless wages crash back down. No sign of that at the moment.

Four pieces. The interesting bit is that core services ex-rents actually rose slightly y/y.

More on Median. It clocks in at +0.19%. Amazingly, that’s despite all of the OER subcomponents being higher than that. Usually to get a low number you need at least one of the big-weight pieces to be there.
But in this case, we had Recreation, Medical Care Services, New Vehicles, Housing Furnishings and Operations, all 4% or higher weights and all less than 1.5% annualized m/m.
That starts to look a little quirky. If even one of the 1% categories had been higher then the median category would have been Fresh Fruits and Vegetables and the m/m would have been 0.29%. Still low but not the number we will see.
I’ll have the diffusion charts in a minute and those are interesting. So, low core and median – you’d think a lot of really low categories right? But only ones below -10% annualized were Public Transportation (-54%, flag that!), Used Cars/Trucks (-15%), and Misc Pers Goods (-11%)
On the high side we had Motor Vehicle Maint/Repair (+13%), Infants’/Toddlers’ Apparel (+17%), Motor Vehicle Insurance (+27%), plus a couple of non-core categories.
But there were a LOT between -10% and +1.4% annualized.
Core ex-shelter fell to 2.62% from 2.80%. It was lower in early 2021 but this is improvement obviously.
as I said the airfares piece is really odd. Never have had 2 back to back months like that EXCEPT at start of pandemic and that was with jet fuel prices plunging. They’re not. This is…hard to believe. It’s a one-off last month I said we could be sure we wouldn’t get again! [First chart is m/m, second is y/y.]

You really can go either way on this number. Here is the Enduring Investments Inflation Diffusion Index. The disinflation is continuing, and that’s good news. OTOH, we have some really crazy outliers like airfares.

Here’s where CPI Airfare sits relative to jet fuel (seasonally adjusted). We are likely to see a catch-up in this next month. I am really curious which routes are getting lots cheaper. I haven’t seen it.

Now, maybe airfares is a micro effect here that indicates a softening in travel and an early warning of decreased consumer spending. Maybe it’s a bullwhip – after “revenge travel” everyone is going back to normal travel demand. Still, betcha we don’t get another -8% next month.
OK last chart. This is y/y but it looks similar m/m. The high bars on the right are shelter and they’re moving left. Few huge outliers on the right. Then lots of little categories strung out between 3 and 7%. Then about 22% less than 2% including 17% in outright deflation.

The outright deflation ones are mostly core goods, and they’re not generally going to stay there. So what we are going to see over next year is all of these things starting to trend back towards the middle. Where’s the middle? I think it’s high 3s, low 4s. But that’s the question.
Bottom line here. Overall number pretty close to expectations. There is nothing here that would argue that the Fed ought to keep raising rates – inflation is drifting lower, and nothing they can do will speed that up.
Indeed, nothing the Fed has done so far has caused this, except inasmuch as higher rates helps the dollar which helps core goods to decline. Now…the Fed also oughtn’t ease any time soon. There’s no sign of deflation here or even stable sub-2% inflation.
Ergo, I think we are going to see the Fed basically go to sleep here for a while, unless the bond market starts to get sloppy because of the huge demand from Treasury. If the Fed needs to intervene and buy bonds…that will be a very bad sign. But not going to happen today!
Thanks for tuning in.

We knew going in that this would be a soft number, and that it also would likely be the softest in a while. We didn’t get as much of a drag from used cars as we expected, but we got some; the real culprit was the large drag from airfares. It’s hard to understand that one, but especially with jet fuel prices back on the rise we are going to get a give-back from that next month in all likelihood. Indeed, the August CPI is shaping up to be sobering. Core should be above 0.3% m/m again, and headline is currently tracking at 0.65% or so on a seasonally-adjusted basis. So store the party hats for now.

That said, it was encouraging to see so many categories with small changes on the month. There were enough changes that median inflation is going to print very low, 0.19% or so, this month. If that were to recur it would be a great sign. Alas, it’s very unlikely that we will see another median like that very soon. As it was, it was almost an 0.29% as the next category above the median one was that much stronger.

From a market perspective, this is positive. That’s partly because “the market” tends not to look ahead very much (yeah, I know you learned something different in school but “the market,” especially in a day dominated by mechanical trading based on parsing the news headlines, does not discount the future very well any more. That’s one reason why we keep having periodic mini crashes when reality abruptly intrudes). This inflation number gives no real reason for the Fed to hike rates again. As it was, the argument for another 25bps after 500bps have been done was always very weak, especially since there is no real evidence that interest rate hikes do very much to inflation. At some point, the beatings get to be gratuitous and sadistic.

The problem is that there is going to be pressure on longer-term interest rates given what’s happening with the budget. I’m watching that carefully. As I write this, 10-year interest rates are back above 4%. With data like this, that doesn’t make a lot of sense. But there’s a lot of paper out there and it may need higher rates to find its “forever home.”

So, enjoy this print. It’s legitimately positive news. Only the folks looking ahead to next month ought to be less cheerful but in the meantime eat, drink, be merry, and buy stonks.*

* This is tongue-in-cheek naturally.

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

Summary of My Post-CPI Tweets (May 2023)

June 13, 2023 Michael Ashton 3 comments

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy, but subscribers to @InflGuyPlus get the tweets in real time and a conference call wrapping it all up by about the time the stock market opens. Subscribe by going to the shop at https://inflationguy.blog/shop/ , where you can also subscribe to the Enduring Investments Quarterly Inflation Outlook. Sign up for email updates to my occasional articles here. Individual and institutional investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Check out the Inflation Guy podcast!

Welcome to the #CPI #inflation walkup for June (May’s figure).
A reminder: At 8:30ET, when the data drops, I will post a number of charts and numbers, in fairly rapid-fire succession. Then I will retweet some of those charts with comments attached. Then I’ll run some other charts.
This month I have to skip the conference call because my daughter has an awards ceremony I need to make. But later in the morning, I will post a summary of these tweets at https://inflationguy.blog and then podcast a summary at http://inflationguy.podbean.com .
Thanks again for subscribing!
Although both nominal and real interest rates have risen across the board since last month, breakevens have been fairly stable except at the very short end.

That represents relative weakness in BEI, which at this level of yields should be moving about 67% as much as 10-year nominal ylds and 2x as much as real ylds. Expectations have been declining partly because of weak energy markets, but then why are short breakevens wider?
In short, market pricing of medium-term inflation seems very confused right now.
That’s perhaps not so surprising. In addition to energy market softness, you also can see plenty of talk about how ‘wages might not cause inflation’ and how rents are due to decline (“no, really this time!”).
Let’s tackle these. First, rents. Ongoing argument on this one. Here’s my take: the former surge in rents was partly a catch-up from the eviction moratorium. I highlighted this divergence back when it first happened.

Now asking rents are declining and effective rents are still rising, beginning to close this gap. But note that the BLS rents figure never did keep pace with the asking OR effective rents.
The top lines haven’t converged yet (to be sure, these are quarterly figures) and the bottom line is behind. I know that current rent indicators had looked softer – although they’ve been recovering lately – but I don’t see a good reason to expect a LOT of softness here.
But if you really think that housing and the rental market are going to collapse like in 2009-10, then you’re going to have a hard time buying breakevens very much higher than you were paying in 2010.
Except wait…in 2010, 10-year breakevens averaged 2.06%. And they’re at 2.19% now. And we don’t seem to be close to any calamity remotely like we saw in 2008-2010.
I think these days, investors avoid buying breakevens not because they don’t believe there aren’t long tails to the medium-term upside, but because they’re worried about the short-term spikes to the downside. It’s MTM fear, not value, I think.
So, rents have been a persistent source of strength to CPI. They are ebbing, but not nearly as fast as the consensus thinks. Last month primary rents were +0.54% m/m. This doesn’t seem wildly high to me. The prior month is the outlier so far.
The other persistent source of strength, ALSO a story I was on a long time ago, is the core-services-ex-rents or “supercore,” which is significant because that’s where wage inflation lives.
There was an Economic Letter from the FRB San Fran a couple of weeks ago called “How Much Do Labor Costs Drive Inflation.” https://shorturl.at/fsvEN The author concludes that “labor-cost growth has a small effect on nonhousing services inflation…”
Well, duh. Obviously, inflation causes more-rapid wage growth, not the other way around. Cost-push inflation isn’t real – if it was, every laborer would love inflation because they would be AHEAD of it. That’s clearly wrong.
So everyone says “wow, this means that supercore doesn’t matter and the Fed might ease.” Except that nothing changes in this argument. Anyone who said core services ex-rents was important because it CAUSED inflation missed the point anyway.
Core services ex rents matters because it causes inflation PERSISTENCE by feeding back inflation. It makes inflation sticky. It doesn’t cause it to spiral higher.
Core services ex-rents will remain firm. That’s a good reason the Fed will not ease any time soon.
Heading into today’s number, both mainstream economists and Kalshi’s markets are looking for core CPI to match or fall short of the lowest core CPI so far in 2023 (0.385%, in March). I am higher. More on that in a second.

One reason I think core will be a little higher is that used car prices were roughly unchanged, but the seasonal adjustment expects a decline. So I think that will add about 3.5bps to the SA number by itself.
Interestingly, the lag structure from Black Book to CPI-Used Cars seems to have changed from 1 month to 0 months. That’s why everyone has been off on used cars recently. No idea why this shifted. Maybe it hasn’t, just a weird recent coincidence. But I don’t think so.

Headline CPI forecasts are pretty close between economists/market/me. I think Food isn’t going to add very much, which is why I’m below the consensus for headline even though above the consensus for core (Deutsche Bank made a similar point in a note out yesterday).
Now, the interesting thing is that after this month and next month, the interbank market is projecting essentially zero headline inflation for the balance of the year. Ran this chart in my blog at the end of May. https://inflationguy.blog/2023/05/31/is-inflation-dead-again/

June to December headline inflation is in the market at 0.125%. Total. That seems unlikely, even though the seasonal adjustment factors would turn that into a +1.4% which isn’t terrible. Still, it is hard to fathom that prices are just going to freeze in place NSA.
Not today’s problem, however! One step at a time. Good luck. I’ll be up with charts and chats right after 8:30ET.

Core +0.44%…worse than expected.
Both stocks and bonds acting like this is good news, so we’ll have to see the breakdown…
It might take people a minute to figure out that this was a solid miss on core. Yes, it was 0.4% versus 0.4% expectations, but it was just barely rounded down to 0.4% while the forecasts (except for mine) were rounded up.
Still pulling down data…the BLS is working very hard to make sure people can’t get it quickly. I can see that Used Cars was +4.4% m/m, which was more than I expected. Core Services jumped to 6.8% y/y versus 6.6%. OER was steady at 0.52% m/m; Primary at 0.49%.
Lodging was +1.80% m/m; but airfares -2.95% m/m (weak again…I just don’t see it!).
Energy dragged about 9bps on the headline, which was in line with my forecast. Food was +0.21% NSA m/m, about same as last month, but that’s a higher SA contribution. Food at home was +0.05% SA; Food away from home (wages y’all) was +0.47% SA. m/m
m/m CPI: 0.124% m/m Core CPI: 0.436%
Consensus missed on core by almost 6bps. My forecast was 0.43%. Headline was soft relative to core.

Last 12 core CPI figures
There is absolutely nothing disinflationary about this chart recently. Haven’t even rounded down to 0.3% on core in 6 months.

M/M, Y/Y, and prior Y/Y for 8 major subgroups
“Other goods and services” bears some looking into. Otherwise no large surprises.

Core Goods: 2.03% y/y Core Services: 6.57% y/y
Core goods maintained its prior y/y level but didn’t extend the bounce despite a nice rise in apparel. Core services is coming off but…not exactly dramatically!

Primary Rents: 8.66% y/y OER: 8.05% y/y
Is this the top of the rollercoaster, and how steep is the drop? Yes is the first answer, but ‘not so steep’ is what I think we’ll conclude on the second. M/M annualized are running at 6% or so, and I think we’ll probably end up between 5-6%. Much better than now, but not great.

Further: Primary Rents 0.49% M/M, 8.66% Y/Y (8.8% last) OER 0.52% M/M, 8.05% Y/Y (8.12% last) Lodging Away From Home 1.8% M/M, 3.4% Y/Y (3.3% last)
…by the way, the reason is higher taxes, higher wages, short supply.
Some ‘COVID’ Categories: Airfares -2.95% M/M (-2.55% Last) Lodging Away from Home 1.8% M/M (-2.96% Last) Used Cars/Trucks 4.42% M/M (4.45% Last) New Cars/Trucks -0.12% M/M (-0.22% Last)
I thought Used would contribute but it was heavier than I thought. New cars being down is surprising. Interesting that core goods was still flat even after this contribution and the contribution from apparel.

Here is my early and automated guess at Median CPI for this month: 0.427%
Median category by my calculation was West Urban OER, so the usual caveats apply about my seasonal adjustment. Might be a bit higher or a bit lower than this, couple of bps either way. However you look at it…no continued disinflation.

Piece 1: Food & Energy: -0.939% y/y

Piece 2: Core Commodities: 2.03% y/y

Piece 3: Core Services less Rent of Shelter: 4.38% y/y
“Supercore” was a little lower, but still at 4.4% y/y.

Piece 4: Rent of Shelter: 8.12% y/y

Probably the best news overall is that core ex-housing is down to 3.45% y/y.
Before I get to ‘other’, let’s look at Medical Care. 0.08% m/m. Pharma was +0.51%, and 3.99% y/y. Doctors’ Services was a drag at -0.50% m/m and -0.09% y/y. Medical Equipment and Supplies was +2.3% m/m (NSA), which is the reason this is positive. Health insurance the usual drag.
Keep in mind that when Health Insurance gets readjusted next year, Medical Care is going to turn on a dime and be a following wind pushing inflation up, not down. The Health Insurance curiosity is a major source of the apparent core inflation disinflation this year.
Other Goods and Services was +0.53% NSA M/M. And it was pretty broad. Cigarettes +0.6%, other tobacco products 0.44%, Personal care products +1%, Misc Personal Services +0.69%.

This is interesting. Really bipolar inflation distribution. Nothing in the middle. A lot of weight to the right, and then a big slug of things to the left. That’s why core is so much lower than median.
Only non-core things that declined more than 10% annualized in May were Car and Truck Rental (-33%) and Misc Personal Goods (-11.9%). Neither more than 0.15% of the consumption basket.
OVER 10% are Used Cars/Trucks (+68%), Motor Vehicle Insurance (+26%), Lodging Away from Home (+24%), and Personal Care Products (+12.8%).

Sort of reinforcing the distribution picture. The weight in “over 6% y/y” is declining but still heavy. Weight in <2% is about 25%, rising but still low.

Finally the EI Inflation Diffusion Index telling the same story. Upward pressures remain but are lessening. This reinforces the ‘inflation has peaked’ story but does not yet support the ‘inflation will crash to exactly 2%’ story.
Wrapping up: bonds like this because there is no reason in here for the Fed to reverse its promise of a pause, when they meet tomorrow. The Fed will stand pat. Stocks like this mainly because it removes that uncertainty.
There is nothing in here that supports the notion that the Fed will soon be able to stop worrying about inflation. M/M core inflation continues to run at a 5% ish level. Y/Y core will likely ease a little further on base effects through September and then level off.
My point forecast for 2023 Median Inflation has been around 5% since last May. It is starting to look like that might be slightly low but pretty decent I think.
Sort of the best-case for core CPI at year-end will be 4.25% y/y. Unless rents and wages suddenly (and inexplicably) drop, it’s going to be really hard to get it below that.
On the other hand, tightening further when inflation measures are gently declining will also be a hard argument. In short, I think the “Fed on hold for a long time” argument won the scorecard handily today.
We not only need lower inflation prints, but the distribution needs to get more uniform. Wages rising at 6% (Cleveland Fed WGT) is holding up services even as core commodities stop declining. Meeting in the middle still looks like 3-4%. Again, hard to ease, hard to tighten.
I think that’s about it for today. I’ll have a few more words in my blog and podcast summaries, but that’s the meat of it. I still think breakevens are too low for this environment!! Thanks for tuning in.

The chart of the day is the one of month/month core CPI figures. Here is another look at it, from Bloomberg. Tell me if you can spot the downtrend.

Nope, me neither. December’s was 0.40%, and the five core prints for this year were 0.41, 0.45, 0.38, 0.41, and 0.44. The six-month average is 0.42%. The 12-month average is 0.43%. The 24-month average is 0.46%. So, if there’s a downtrend, it’s a really gentle downtrend. Base effects from last year will cause the y/y number to glide down a little bit further, and base effects in headline inflation may cause that number to decline as well although that’s a lot less clear. We’re tracking towards something like 4-5% inflation. I’m a trifle more optimistic than that, thinking we will eventually settle in the 3-4% range, but my operating hypothesis for a while has been that we have entered a new distribution with a higher mean. I could still be wrong on that, of course, but so far there’s nothing to suggest that inflation is going back to 2%.

Unless, of course, you think rents are about to flop. There has been some recent research on that, and as a result there is near-unanimity of the view that rents are going to be flat to declining “soon.” I’ve read the research, and it’s not convincing. Error bars for the forecast period are very wide right up until we get actual data, and the period over which the relationship is purported to exist is not similar to the period we are in.

Remember, people also thought that home prices would collapse under the weight of higher interest rates. They dropped a couple of percent, and are rising again already. Not only that, but mortgage delinquencies just dropped to the lowest level in 20 years: not what you’d expect if higher rates are crushing homeowners. What higher rates are doing is hurting builders, who will build less as a result, and landlords, who will raise rents as a result. The fact that economists want monetary policy and inflation to work this way isn’t sufficient. It just doesn’t.

This is not to say that there aren’t some good trends in the data. Our diffusion index clearly signals that the pressures towards higher prices are slackening. Some products and services that had seen extreme spikes are retracing. But wage growth is still 6%, and there are still a lot of goods and services which haven’t yet fully adjusted to the new price level. So: there will continue to be volatility in prices for a while, with some good news and some bad news and a gentle trend towards less inflation.

Sounds like “Fed on hold” to me.

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

Summary of My Post-CPI Tweets (April 2023)

May 10, 2023 Michael Ashton 2 comments

Welcome to the #CPI #inflation walkup for May (April’s figure).
A reminder: At 8:30ET, when the data drops, I will post a number of charts and numbers, in fairly rapid-fire succession. Then I will retweet some of those charts with comments attached. Then I’ll run some other charts.
After the tweeting dies down, I will have a private conference call for subscribers where I’ll quickly summarize the numbers. After my comments on the number, I will post a partial summary at https://inflationguy.blog and later will podcast a summary at http://inflationguy.podbean.com.
Thanks again for subscribing!
The market backdrop going into this one is very different from last month, when we were still dealing with panicky banking-collapse stuff. There are still some people selling that story, but there’s no real meat to it.
But breakevens have come in, and real yields risen. And the Fed has tightened for what is likely the last time in the cycle. Some people are REALLY sold on the deflationary-depression scenario but right now shaping up to be a mildish recession with continued high inflation.

That’s going to put the Fed in a classic bind, but with this Fed…maybe not really. I’ll say more about what I think about the Fed (big picture) in our Quarterly next week (subscribe at https://inflationguy.blog/shop/) but in sum I think O/N rates stay high all year.
Next year, when inflation is still not coming down to their target (I think), they’ll have some decisions to make but for now, a mild recession won’t get them easing aggressively as they did under Greenspan/Bernanke/Yellen. It’ll be Silence of the Doves.
The forecasts this month have amazing agreement in the headline figure, which is interesting because Kalshi and economists’ estimates have been rising meaningfully over the last week or so. I’ve been pretty consistent. I agree on headline. I’m significantly higher in core.

Here’s why.
Last month, core was a little soft, but not a ton. That in itself was remarkable, because rents decelerated a LOT m/m. And used cars was also a drag despite private surveys suggesting it should have been an add.
So the fact that core was just a LITTLE soft was pretty amazing. Median (a better measure) dropped a lot because of rents, but the fact that core was resilient tells you there were some long-tail upsides. Diffusion indices are showing strongly that the peak is in, but…
…but Core Goods having possibly bottomed (Used Cars should FINALLY deliver this month) means that the deceleration is going to be all rents and core services from here. So same stories but getting bigger going forward as the turn in Core Goods runs its course.
And I do not believe in the sudden deceleration in rents – because nothing in rents happens suddenly. I think all the folks who have been looking for it for a while are succumbing to confirmation bias in thinking this is real.
Maybe they’re right – another weak rents number will mean a lot to me. But I took note that the y/y rents figures still rose, which means that last year in the same month it was even weaker! That smacks to me of seasonal-adjustment issues.
That doesn’t explain the full deceleration from 0.7 to 0.5 in rents, but it would explain some. I think we’re going to bounce back, but if we get another 0.48% on primary and OER, I’ll take notice.
I also want to look at Food Away from Home. I wrote about this last week https://inflationguy.blog/2023/05/04/food-inflation-served-hot-and-cold/ – Food At Home and Food Away from Home have now diverged, and the FafH is tied more closely to wages.
So: Core ex-rents, but also rents. And Food Away from Home as part of the Core ex-rents-imbued-with-momentum-from-wages meme.
Do note that y/y core will decline even if we get my number (0.46%), and likely median also. It will help cement the idea the Fed is going to wait for a while.
(Then again, last month I said I didn’t think they’d do 25bps because 25bps just doesn’t matter. But now we also have them signaling as much. It’ll take a lot to get them to move either direction soon.)
Honestly, I need to step back and watch for a while myself. So far, the last few years have been relatively easy to call. But now we have a rapid rebound in velocity (which I expected) and declining M2 (which I did not).
For the trajectory of inflation beyond this summer, we need to know which of these is going to win. I have trouble believing M2 will keep declining, especially as money demand gets adjusted to the new interest rate regime. But it’s an open question.
And a very important question! And one that will not be resolved today! But it will be an interesting report I think – I’ll be back with more at 8:31ET. Good luck.

okay. 0.409 on core…pretty darn good work by economists and Kalshi!
Very nice jump from Used Cars…+4.5% m/m. So that’s an overdue catchup.
OER 0.54 and Primary Rents +0.56 m/m. That’s a jump compared to the prior month, but quite a bit lower than trend. Some deceleration is probably happening, but last month was an illusion as to how much, probably from seasonal quirks.
Core goods rose to 2.0% y/y (largely on the strength of the aforementioned Used Cars) and Core services fell to 6.8% y/y.
Here is Core. This month right in trend. 0.4% is still almost 5% per year!

Median retained most of its deceleration…but didn’t decelerate further m/m. Oddly, also 0.41% as with core. Normal warning: looks like one of the regional OERsis the median category – ergo, my estimate might be off since I have to guess at seasonals.

Medical Care was the usual drag, but everything else was positive. There were some drags, but mainly the story here is rent deceleration.

I noted the acceleration in core goods, which is mostly used cars this month. But I think the macro trend that we’ve seen most of the core goods deceleration is in place. Will it bounce to 5%? Probably not. But it’s no longer going to drag overall inflation lower.

Primary Rents have officially peaked. OER, not yet. Soon. As with the overall inflation numbers, which peaked but won’t be declining as much as people were expecting, so it will be with rents.

So in the so-called COVID categories, Airfares were -2.5% m/m; Lodging Away from Home -3.0%; Food @ Home -0.17%(sa) and Food Away from Home +0.37%(sa). This latter is a noticeable slowdown.
Piece 1: As-expected look. I thought Food would add 0.03% to CPI but it actually added about 0.02% it appears. Nothing surprising in this.

Piece 2 is Core Commodities – already commented on this.

Core Services less ROS – this is starting to look less-horrible. Still, 5% isn’t lovely but this is the wage-driven piece. Taken together with the Food-Away-from-Home improvement, there seems to be some signs that the wage-price feedback is slowing some. And that’s good news.

And rents are still high. While the Core Services piece is showing decent signs that it may have peaked, a deceleration in rents is still an article of faith. It will happen, but I don’t see it falling to 2% or lower, which is where some people think it’s going.

(Some people still think housing is going to collapse. It’s not going to. Prices are already starting to rise again.)
Core ex-housing went from 3.81% y/y to 3.75% y/y. Still pretty high even with the drag from core goods. Overall, the picture is IMPROVING but not good yet.
…and that story, actually, supports the idea of a Fed pause. “We finally turned back the attackers from the walls. Now let’s wait and see if they regroup or if the battle is over.” That’s the wise course.
You know, I gave economists a bit too much credit earlier. Their HEADLINE guesses were 0.41. Their core numbers were lower. We were about equally off. I was too high, because I thought rents would rebound more than they did. They were too low, for whatever reason.
Sort of interesting that Recreation was +0.5% m/m. That’s a heterogenous category so it usually doesn’t do a lot. This month, Video and Audio was +0.45% (nsa) and Pets were +1.82%(nsa). Those are the two largest pieces of Recreation. Interesting bump from pets.
Within Medical Care, Doctors’ Services was a drag and now is just +0.27% y/y! But Pharma added 0.42% m/m. The insurance drag continues to be what keeps that category inert (and, actually, it’s in core services ex rents so it’s also holding down “Supercore” some).
Nothing really illuminating amongst the biggest gainers/decliners. Core categories Public Transportation was -46% (annualized monthly, which is what goes into median), Car/Truck rental -33%, Lodging Away from Home -30%.
Gainers: Motor Vehicle Insurance +18%, Misc Pers Svcs +33%, Used Cares +69%. Actually some people say the insurance part is likely to continue for a bit. Lots of theft and higher car prices means that insurance rates need to rise too because cost-of-replacement is higher.
Diffusion index down to 14!

Okay, let’s try a conference call. Bottom line is I don’t think this figure is as good as stocks seem to think. But it DOES support the Fed-on-hold thesis. Still, it was a little higher than expected. Here is the conference number. I’ll start in 7 minutes.

Today’s number, while higher than expected on core by a little bit, was roughly in line with expectations. I was higher on my forecast than the consensus, because I thought rents would bounce back further and they didn’t; others were too high because they thought rents would keep dropping. I think that’s the main difference. Most of the rest of what is happening in the number was roughly what people expected. It was nice to see Used Cars bounce, since they were about 2 months behind what the private surveys were promising us – so not really a surprise.

While this is an expected number, that’s not saying it’s a wonderful figure. 0.4% monthly on core CPI…which is where we have been for the last 5 months…still gets you only to about 5% core for the year. That’s not where the Fed wants to see it.

On the other hand, it’s also clearly off the boil and most of the CPI is decelerating at least a little bit. It’s nice to see core services ex-rents (so-called “supercore”) decelerating, although we should remember that includes Health Insurance which is in the midst of a year-long mechanical adjustment that will swing the other way in about 6 months. But overall, the arrows are pointing in the right direction.

That’s distinctly unlike what was happening with the “transitory” nonsense, when the great bulk of the CPI was moving in the wrong direction – and not just the transitory pieces. So this is welcome.

And it supports the Fed’s decision to pause in rate hikes while continuing to slowly reduce its balance sheet. As long as the numbers continue to decline and nothing blows up that demands the Fed’s immediate attention, rates will stay on hold. I don’t think a minor recession, with inflation at 5%, will get the Fed to ease. Now, 6 months from now when it becomes obvious that inflation isn’t going back to the Fed’s target they’ll have some decisions to make, but that’s a story that will play out in slow motion. For now, we have a figure that supports ex-post-facto what the Fed chose to do this month.

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

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