inflation | E-piphany

You Have Not Missed It

November 18, 2021 Michael Ashton 8 comments

Recently, 10-year inflation breakevens reached 2.78% – matching the all-time highs (since TIPS were issued in 1997) from 2005. If you think about breakevens in the same way you think about TSLA, then it may seem to you that this is a very bad time to buy inflation. No one who bought 10-year inflation at 2.78% or in that neighborhood has ever had a mark-to-market gain.[1] Heck, for a couple of decades it has been a fairly automatic trade to dump 10-year breakevens once they got a bit over 2.50%. Moreover, with y/y inflation at 6.2% – even if it goes a little higher still before it ebbs – it certainly seems like the worst is behind us, right?

I hear from a lot of investors who are afraid that they “missed the trade.” The first spike happened so quickly that not many people outside of the inflation geeks had time to get on board. And we’re only just now figuring out (well, it’s only just now becoming common knowledge) that the “transitory” effects have lasted and are lasting a lot longer than we were told to expect. These tactical traders feel like they missed a once-in-a-generation, if not a once-in-a-lifetime, trade in inflation, which is now over.

Relax. You have not missed it.

Okay, perhaps you should have bought inflation when 10-year breakevens were at 0.94%. At that level, the market was making a huge bet that inflation was forever dead. There was almost no risk in buying inflation at that level, as I pointed out at the time. That was the right trade, and the easy trade, and I know you’re committed to buying those levels the next time you see them. Unfortunately, you won’t. Those levels won’t be seen again for decades, if ever. The only way they could happen is because there was no natural bid for inflation risk, no one who was worried about it. No matter what happens to inflation from here, lots of people have learned that it’s something you ought to be worried about, especially if you can hedge it essentially for free as you could 19 months ago.

But that doesn’t mean you oughtn’t buy longer-term inflation even though the current levels are high. The chart below shows 10-year inflation breakevens, in white, versus contemporaneous core CPI in blue.

Obviously, I’m comparing a 10-year forward-looking rate to a 1-year backward-looking rate, but my point isn’t that there are good times and bad times to buy breakevens based on what has recently happened. In fact, my point is almost the opposite. My point is that historically, it has paid to ignore what has recently happened, and focus on whether or not breakevens are a bargain relative to the equilibrium level. Over the period since TIPS were first issued, core CPI has ranged from 1% to 3%, and averaged almost exactly 2%. That’s the blue line. The question then, is not whether breakevens are a good deal here if inflation is going to go back to a sedate 1%-3% range for the next decade; in that circumstance they certainly aren’t. On the other hand, they aren’t a disastrous trade in that case, but certainly not a very good one. The real question, though, is whether the equilibrium range going forward really is going to be centered around 2%. Because if instead it is going to be centered around 3%, then you’re buying breakevens below the midpoint of that future range (and you get great near-term carry in the bargain).

There are a number of reasons that I think we have moved into a new post-2% regime. A lot of those reasons were already hinted at prior to the current crisis and the ensuing irresponsible policy response. For example, one following wind that the global economy enjoyed from 1993 or so until the mid-2010s was a gradual increase in globalization. The movement of production to lower-production-cost countries, especially in an era of cheap transportation and low tariffs, was a net gain to society in the classic Ricardian sense, and allowed all economies to have a better growth/inflation mix. However, that impulse was already starting to wane prior to Trump, and in the last 5 years the globalization arrow has clearly reversed in no small part because of intentional policy decisions to do so. That’s just one example of how the cycle, in my view, was already reversing.

Since the policy response to COVID, however, the inflation idyll has been decisively shattered. Manufacturers in many industries have been forced to shift strategies about passing through costs – strategies that are very hard to restore to the old way. The high inflation prints, especially in the context of product shortages, have emboldened labor in ways we haven’t seen for some time. Increased unionization is likely to follow an increase in the level and volatility of inflation, which naturally will help institutionalize levels of inflation that are not outrageous in the grand scheme of things but which are still damaging compared to the Way Things Were.

Thus, I think we are out of the 2-percent-as-the-center-of-the-distribution era, and into an era where the middle is more like 3%. The bad part is that inflation regimes don’t usually stay stable except at low levels, so that we are going to have higher inflation volatility, and there’s a decent chance that equilibrium level bleeds higher over time.

That’s the bet with 10-year breakevens. In the short-term, some of the “transitory” factors are going to ebb (prices won’t fall, but their rates of change will), although other factors will emerge too. The inflation derivatives market is pricing in headline inflation over 7% in the next few months, but that will likely be the peak. But rents are going to be pushing up, and core and median inflation are not going to go back to 2% very soon. I’ve seen some forecasts that by late 2022, core will be around 1.5%. I think that’s wrong by 200bps.

There is one final point that I will explain in more detail in another post. Breakevens also should embed some premium because the tails to inflation are to the upside. When you estimate the value of that tail, it’s actually fairly large. But for now, let me just assure you: the train has left the station, but it is still making stops. There’s time to get on board.

[1] Sticklers will note that this isn’t quite true. In 2005, headline inflation reached 4.7%, so an owner of breakevens might actually have had a net profit on income and inflation accretion, at least for a while, even though breakevens retreated from there. But it still wouldn’t have been a great trade and you would have had to be nimble to make any money at all.

Categories: Causes of Inflation, TIPS Tags: breakevens, inflation

Summary of My Post-CPI Tweets (October 2021)

November 10, 2021 Michael Ashton 1 comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Do you see the problem?

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

Summary of My Post-CPI Tweets (September 2021)

October 13, 2021 Michael Ashton 2 comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Biden to meet with ports, labor on supply chain bottlenecks

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

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

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

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

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

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

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

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

Summary of My Post-CPI Tweets (August 2021)

September 14, 2021 Michael Ashton Leave a comment

Happy last- #CPI – day-of-summer! Is the transitory spike over?
Before we get started, a little housekeeping. Get the Inflation Guy app in your app store! And if you want to see some super-embarrassing photos of me, check out the Bloomberg Businessweek story just out today by @beth_stanton https://www.bloomberg.com/news/articles/2021-09-14/inflation-guy-michael-ashton-sees-more-on-the-way-as-investors-worry
The story is terrific. Beth is a fantastic journalist. But as for the pictures…I can just say, “I’m working on it.”
Anyway back to our story…This is the first time in months that the interbank CPI market has been at or slightly below the economist consensus estimate for headline inflation. (Pretty close though.) Previously, the interbank market was generally higher, and more accurate.
The last five actual prints on core CPI are +0.34%, +0.92%, +0.74%, +0.88%, and 0.33%. The consensus for today is a lowish 0.3% (something like 0.27%).
So economists – and the inflation market – are pricing in at least a LITTLE ‘transitory’ here with core inflation coming down from the peak…although I’ll note that 0.27% annualized is 3.3%. That’s still well above the Fed’s target. Not that they care very much.
That sort of month/month core CPI print today would see y/y drop to 4.2% from 4.3%, since last year we got +0.35% in August. Transitory! Yay! We win! Except that celebration will be short-lived.
The next 6 months of core range from +0.03% to 0.19% m/m. Very easy comps. So unless something weird happens, core inflation is going to be higher in 6 months than it is today.
I think there’s a little upside risk to the number today, partly because expectations are so tame. Used cars, which are past the y/y peak, still rose in price last month according to Black Book. So that would be a surprise.
However, that would distract from the more important issue this month and going forward: with the eviction moratorium lifted in many parts of the country, how fast do those units turn over at much higher rents?
I don’t really think that will be a big effect THIS month – too soon – but it will become increasingly important going forward. I’d even say it is THE story going forward in terms of how high core CPI will get in this ‘transitory’ bump.
OER and Primary Rents have started to see a little bump higher, although they were softer last month than in the prior month. I’m trying not to be obsessed with the wiggles. Anyway the lows are long past for rents.
Let’s be real: just as people waved away Used Cars as a “reopening category” or “idiosyncratic,” they’ll say the same with housing. “One time effect!” they’ll say.
But what will be harder to explain away will be inflation’s BREADTH. Our diffusion index is the highest in years, because it’s not JUST the reopening categories.
So be careful of all the “ex-cars” and “ex-reopening categories” metrics. They did that in the 1970s too. An increase in the number of anecdotes is what inflation IS, after all. Go listen to my “Diamond Water Paradox” podcast. https://InflationGuy.podbean.com/e/ep-2-diamondwater-paradox/
The PPI is telling us that the upstream pressures on materials, shipping containers, wages, etc are strong, and those pressures are broad. Yes, a lot of em are pressures on goods and not services. But it’s much more dangerous than hotel prices just catching up to the prior drop.
The next question people will ask: “Does this print mean the Fed taper is on?” And the answer is, I give a taper a 50-50 chance of starting and a 15% chance of completing. I don’t think the FOMC will be able to stomach the market correction.
So buy dips in breakevens if you see them, but I’d be more skeptical at selling nominals outright. Not sure the Fed will lock nominal rates as they did post-WWII, but they’re leaning against you.
And I said this last month and repeat it: Stocks probably go up either way on today’s number, because that’s what stocks do these days (until they don’t).
That’s all for now. My gut says a better chance for a high surprise than a low surprise today. And watch what happens to median CPI, later. Get the Inflation Guy app! Listen to the podcast! Follow the blog! https://mikeashton.wordpress.com Visit us at https://enduringinvestments.com ! Good luck!

Team Transitory starts a comeback with a goal just before halftime!
0.10% on core m/m, dropping the y/y to 4.0%. Not just a miss, but a big miss.

Used cars fell hard, -1.54% m/m. Last month I pointed out the m/m movement in the private surveys is only the same SIGN about half the time. But I fell for that this month as Black Book went up but CPI went down.
Lodging Away from Home -2.92% m/m. Gosh, wait a minute, look at this…
Are we going to have to call these the “re-closing” categories? Airfares -9.11%. Lodging AFH -2.92%. Used cars -1.54%. Car/Truck Rental -8.48%. Wow!
However, New Cars and Trucks – where you’re seeing the chip shortages and plant shutdowns for want of parts – was +1.22% m/m.
OER was +0.25% m/m, and Primary Rents put in a larger rise to +0.31% m/m. So let’s not get too excited about that miss right now…
Primary Rents, re-accelerating slowly. It will not be long until this is over 5%.

And OER. Again, these are the big pieces.

So core goods fell to +7.7% y/y from +8.5%, and core services fell to +2.7% from +2.9%.
Worth noting as the Biden Administration goes after pharmaceutical producers: CPI for Medicinal Drugs remains in deflation. Go get ’em, Joe.

Core CPI ex-shelter (which means less when Shelter isn’t leading the charge) fell to 4.79% y/y. In June this was 5.81%.
Apparel was +0.37% m/m, keeping y/y at 4.2%. Apparel is a small category, but we import almost all of it. So it isn’t surprising to see this rising for a change (but last month it had declined). At a 3% weight in the basket though, it doesn’t dominate anything.
Medical care outside of pharmaceuticals was flat in Doctor’s Services (+0.01% m/m), but up big in Hospital Services (+0.85% m/m). So the overall Medical Care subindex gained despite the weakness in drugs.

It’ll be interesting looking at the breadth this month. Seven of the eight major subindices rose, with only Transportation declining due to the Used Cars flop. Still shaking my head at the re-closing categories.
College Tuition and Fees +0.88% m/m. But that doesn’t annualize the way you think it does. It always jumps in August and September and then levels out for 10 months. The y/y is up to 0.83%. This is NOT quality adjusted, or it would be lots higher.
So the biggest decliners in non-food-and-energy: Car/Truck Rental (-65% annualized), Public Transportation (-49% annualized), Lodging Away from Home (-30%), Motor Vehicle Insurance (-29%), Used Cars and Trucks (-17%).
Biggest gainers: Jewelry and Watches (+23%), Motor Vehicle Parts and Equipment (+22%), Household Furnishings and Ops (+16%), New Vehicles (+16%), Men’s and Boys’ Apparel (+13%).
So…here’s the thing. My early guess at Median CPI is +0.33% m/m, which would be the highest since early 2007. So folks, this isn’t as tame a number as it looks like. Rents are rising, and inflation is broadening.

If you took out Used Cars, Lodging Away from Home, etc when they were spiking, then to be fair you should be taking them out now when they’re declining. Because that’s most of the story here.
Quick chart of y/y core goods and services inflation. Core Services has a much larger weight, and much of it is rents. Core goods off the boil but has a ways to decelerate yet.

Let’s do the 4-pieces chart and the diffusion index then wrap up.
Piece 1: Food & Energy. Steady upward pressure, but of course this tends to be mean-reverting.

Core goods – I already basically showed this chart. Used cars starting to decelerate and pull this down, but New cars accelerating. And broad pressure elsewhere. Watch this. If it goes only back to 3%, that’s a big deal. It’s been a deflationary force for many years.

Core Services less Rent of Shelter. Steady downward pressure in pharma, but upward in hospital services. Downward in public transportation. But still, not collapsed yet.

And piece 4, rent of shelter, the biggest and slowest and the story for the next year-plus. Going lots higher.

Actually while the diffusion index is calculating let me start the wrap-up. First: this number was truly weird in that reopening categories that had been leading the so-called ‘transitory’ spike were the ones that went down. I don’t know that anyone was looking for that.
But OUTSIDE of those “re-closing” categories, inflation was pretty solid. Rents and OER rose, although we haven’t yet seen much effect of the end of the eviction moratorium. We will. And there was pretty good breadth.
So what does this mean for the Fed? GREAT NEWS! A larger-than-expected decline in core CPI will give the doves what they need to demur on tapering. I think the odds of tapering just dropped. But they didn’t much want to taper anyway.
I don’t think this really changes the narrative – rents are going to drive core inflation higher, and the broadening inflation is going to help un-anchor inflation expectations – but it gives the most dovish Fed in 40 years cover.
10-year breakevens at this hour are -2.5bps or so. They’ll be a little heavy as the carry traders lighten up, but this is a dip that is worth buying IMO. Of course, there aren’t many retail products where you can make that play.
Here’s the last chart. I pointed out the rents thing, which will be one big story going forward. The other is the broadening of inflation. The Enduring Investments Inflation Diffusion Index declined (vy slightly) this month, but it’s still at levels rarely seen in last 20 years.

That’s a wrap for today. I appreciate the follows, re-tweets, and counterpoints. If you’re interested in investing implications of all of this, hit our contact form at https://www.EnduringInvestments.com Download the Inflation Guy app. Try out the podcast! Thanks for tuning in.

The upshot of today’s figures is simple: we expected the Used Cars, Hotels, and other “COVID categories” to flatten out after their big rebound. But no one that I know was looking for them to plunge again. That’s weird, but it makes analysis pretty simple. If you thought that it made sense to look through those one-off spikes to the underlying trends before (although the underlying trends weren’t all that encouraging, they were better than the spikes!) then you ought to probably look through the re-collapse. And outside of those “re-closing” categories, inflation is broadening and rents are accelerating, just like I’ve been expecting. So don’t get too excited that we’ve seen the peak in inflation just yet.

Remember the comparisons to last year get super easy here for the next six months. September 2020 was +0.19% on core inflation; then we have +0.07%, +0.17%, +0.04%, +0.03%, and +0.10%. And Lodging Away from Home won’t plunge every month – I’ll take the “over” on all six of these. And that means y/y core inflation is going to be accelerating from today’s 4.0%, for at least the next six months.

Moreover, median inflation is going go be rising towards those numbers too, as will trimmed-mean and the other better measures of the inflation distribution’s central tendency. There’s not much in this figure that is bona fide good news for the Fed. But I think they’ll take the win anyway, even if it’s on a bad call by the referee.

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

Average Inflation or Price-Level Targeting: Where Are We Now?

August 19, 2021 Michael Ashton 3 comments

One of the reasons the Federal Reserve has been slower than usual to respond to the upswing in inflation, in addition to claiming that it believes any acceleration to be ‘transitory,’ is that the FOMC cleverly changed its modus operandi a couple of years ago to focus on “average inflation targeting,” or AIT. This adjustment in policy had been debated for many years, as the Committee grew concerned that the Fed could lose credibility (ha ha) in the downward direction if it did not commit to its 2% target symmetrically. They were afraid that, if investors believed they would respond aggressively to inflation but not to disinflation, they would start to incorporate this asymmetry into their investment decisions and push the economy uncomfortably close to price stability.

Parenthetical editorial comment – the idea that the Fed needed to fight against the notion that it might be too hawkish is a head-scratcher. It is unclear how the Federal Reserve could be less dovish than it has been in practice for the last dozen years.

In any event, AIT is similar to price-level targeting, although it is more flexible in terms of the period over which the average is intended to be taken. The Fed meant to signal that it would allow a period of above-target inflation to persist, until at least the period of below-target inflation had been compensated. But again, AIT is vague about what all of this means. However, it happens to have been timely as the Fed now can evince patience with higher inflation, since there had been an extended period during which prices were “too stable.”

How are they doing?

In my recent article “CPI Forwards Show Inflation Concerns Aren’t Ebbing,” I discussed how inflation forwards could be estimated, and give a steady reading on particular points in the future. Here is what that would look like today. If we measure 2.25% target CPI growth (which is roughly 2% on PCE, given the historical spread), then from the announcement of AIT the chart below shows the actual inflation index, and what is implied about the future.

This chart would suggest that the Fed chose an inauspicious time to begin focusing on AIT, since already the undershoot from 2019 has been fully retraced and then some. Moreover, the market seems to believe that the Fed is going to have to focus on a new level, as prices will never get back down to a level implied by 2.25% from the inception of AIT.

As I said, though, the great thing about AIT (from the standpoint of a political economist) is its vagueness. If we instead take as the starting point of the average the period just after the global financial crisis, when rents were recovering at last, then you get a much more agreeable picture. Looked at this way, the market is generously giving credit to the Fed for making a perfect landing, very gradually, over the next 5-10 years.

That seems a bit too generous by half in my opinion, but the takeaway is this: even choosing an extremely long averaging period, the Fed has already used up as much slack as it had saved up. If the next year’s worth of inflation outturns deliver what I think they will deliver, then either the inflation curve is going to become increasingly inverted or the Fed will have to recognize that investors are not buying the AIT framework.

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Categories: Federal Reserve, Uncategorized Tags: AIT, average inflation targeting, Federal Reserve, inflation

Summary of My Post-CPI Tweets (August 2021)

August 11, 2021 Michael Ashton 1 comment

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

administration says the FTC should ‘monitor the U.S. gasoline market’ and ‘address any illegal conduct that might be contributing to price increases for consumers at the pump.’ https://cnbc.com/2021/08/11/as-gas-prices-rise-white-house-says-opec-action-is-simply-not-enough-calls-for-ftc-scrutiny.html >> Actual cause is a loopy guy w/ a blank check enabled by printing press.
And with that, good morning! #CPI Day again. This is the first one in a long, long time where I have heard people suggest “this is the biggest economic release of the month” and MEAN it.
Before we get started, a little housekeeping. Get the Inflation Guy app in your app store! Tune in to @TDANetwork at 1:45ET today, where I’ll be on with @Npetallides. And register for the Simplify webinar tomorrow at https://us02web.zoom.us/webinar/register/5216230941517/WN_O20LE_xlRUOAe7ysdVBDnA . Busy busy Inflation Guy

Now for the walk up: We’ve now had four “high” surprises in a row from the CPI report. In each case, the market for the setting (in the interbank CPI market) has been closer than the economists’ estimate, but still too low.
The last four prints on CORE CPI are +0.34%, +0.92%, +0.74%, and +0.88%. The economist consensus for today is 0.4%, with the market closer to a rounded-up 0.5%.
(N.b. Core CPI doesn’t trade, but the headline CPI index traded at 273.1 yesterday and that implies 0.54% m/m on headline and something a little less on core)
If the economists are right, y/y headline will drop down to 5.3% (just barely) and core to 4.3% from 4.5%. That will be the first decline in quite a while. Unfortunately, the comparisons to last year get easier from here. For the next 7 mos, core is comping 0.14% on average.
So even if today we see an ebb in y/y due to base effects, I believe we still have significantly higher highs in core inflation ahead.
Now, on the details: we may ACTUALLY see a DECLINE in Used Cars CPI, as the Black Book Used Vehicle Retention Index, the best leading indicator of Used Car CPI, dropped 2.5% last month.
But before you get too excited, note that the change in the BB index m/m only has the same SIGN as the change in the used car/truck index about 50% of the time over the last decade. Lagged 1 month, it’s about 60%.
So better chance for a decline in used cars next month. But it’s a risk of a drag, and it hasn’t been a risk for a while. One way or the other, the BIG contributions from Used Cars are past.
On the other hand, there’s still other “reopening categories” such as airfares, lodging away from home, and car/truck rental that are likely to still be jumpy. And New Cars as well, though this is less obviously a ‘reopening category’ and more about supply chain.
Who cares about those, honestly. If that’s where the strength comes from, economists just wave their hands dismissively and say “transitory.” Where I’m focused is shelter (of course), and on BREADTH.
Shelter will eventually rise a lot. For a while, the eviction moratorium was holding the average-paid-rent below asking rent increases. And, with another (questionable) extension in the moratorium, that effect is still there.

But we have started to see some increases in Primary rents and OER anyway. The difference is just too wide. So, while the meat of that acceleration is ahead of us by some ways, I’m expecting to see it start to happen.
And breadth – that’s the real story to watch. Our diffusion index is the highest in years, because it’s not JUST the reopening categories (whatever you read). The scariest number would be another 0.5% on core but without contribution from reopening categories.
Now what’s the market impact? Interesting question. There now looks like there is a majority of Fed heads who are willing to at least talk about tapering, and a high core number will reinforce that. But the important voices on the Committee remain firmly dovish.
Personally I think that, faced with the decision of somewhat higher inflation vs sharply lower markets, the Fed will err on the side of somewhat higher inflation and keep hoping their models are right.
So buy dips in breakevens (the high tails are not priced in, anyway), but not sure I’d be as eager to sell strength in nominals. Stocks probably go up either way, because that’s what stocks do these days (until they don’t).
There’s a lot of chatter from companies about being forced to push through price increases and seeing consumers actually not push back as much as they thought, so this is feeling less transitory every day. Don’t think we are going back to 0.1%-0.2% per month soon.

That’s all for now. My gut tells me the consensus has finally gotten to something close to a fair bet, but I won’t be shocked at all if we get another 0.7% on core. I also won’t be surprised by a small miss lower caused by some one-off change. So fair, but large error bars.

Well, on headline CPI it was finally a tie between economists (slightly too low) and the market (equally too high). But pretty close. Core was 0.33% m/m, slightly soft of estimates.

0.33% m/m, of course, is still 4% annualized on core. But let’s see the breakdown.
Glancing I can see the curious bit will be the softness in Primary Rents. 0.156% m/m vs 0.23% last month. That seems odd, but importantly it also is unsustainable. Primary rents are going to go MUCH higher.
In reopening categories, Airfares FELL -0.14% m/m (+2.7% last mo). Lodging Away from Home +6% (+6.95% last). Used Cars +0.22% m/m – no decline, but feels like it after +10.5% last month! New Cars +1.72% m/m.
Now here’s a big surprise in a very little category. So not much impact, but car and truck rental -4.6% m/m. Last month +5.2%. Rented a car recently? That’s an odd one. But only 0.13% of CPI so rounds to 0.01% effect.
The broad core categories: Core Goods +8.5% y/y (8.7% last month); Core Services +2.9% (3.1% last month).
Core inflation ex-shelter decelerated to only 5.3% y/y from 5.8%. That’s a little tongue-in-cheek. But to be fair, used cars is still a large part of this.

Only large declines (<-10% annualized) in core were Car & Truck Rental and Motor Vehicle Insurance. Large increases in Lodging Away from Home (101%), Personal Care Services (29%), New Vehicles (23%), Car parts/equipment (13%) and Car maintenance/repair (11%). All m.m ann’lized.
Early guess at Median is that it will be 0.30%, which would be the highest in several years if I am right. And that speaks to breadth.

Here is y/y Rent of Primary Residence. Again, this has a long way to go, to well above the prior levels in fact, unless the boom in housing prices never get reflected in rents.

And here is Owners’ Equivalent Rent. Which is moving higher a little more earnestly, but still reasonably inert.

Haven’t mentioned apparel. On a nonseasonally-adjusted basis it fell 1% m/m, but seasonally adjusted +0.04%.
And I haven’t mentioned Medical Care. Overall +0.26% m/m. Breakdown: Drugs +0.17% (-0.39% last month), Doctors’ Services +0.40% (+0.26%), Hospital Services +0.55% (+0.22%). Some signs there.
CPI – Doctors’ Services (y/y). Interesting ratchet pattern.

…if you ever think you understand the CPI, just look at Health Insurance. In the CPI, Health Insurance is a residual since consumers don’t pay most health insurance directly. Went from +21% to -9% y/y over last year.

So, the four-pieces breakdown. Then we’ll look at diffusion. Here is Food & Energy. No surprise. Not core, but felt in the pocketbook acutely especially by lower-wage employees.

Core Goods – slightly off the boil, thanks to Used Cars. This will come back down as the y/y Used Car spike gradually leaves the data. I’m not worried about this staying at 8%. But 4% or 5% given global shipping problems – wouldn’t surprise me.

Core services, ex rent-of-shelter. Air fare softness, motor vehicle insurance softness, car and truck rental softness – none of those likely to remain very soft in the near term I don’t think. And medical care heating up a little.

And rent of shelter. To be sure, a lot of this is Lodging-Away-from-Home. But then, so was most of the decline. This piece is going MUCH higher over the next year. Our model for OER has it over 5% next year.

Now, the big story is the diffusion. Inflation is broadening. Our inflation diffusion index is the highest in nine years. So it isn’t just the reopening categories, folks. Your eyes ain’t lying.

Here is the distribution of category price changes. Six months ago, this was skewed to the left. Now, it’s skewed to the right. Long tails to the high side is a signature of an inflationary process.

So, let’s sum up. The reopening categories are lessening in importance as we knew they would. Is inflation transitory then? It depends on the answer two two questions:
is shelter inflation going to rise? And/or is that transitory? Shelter is slow, and right now it is depressed by the eviction moratorium. It has a LONG way to go, unless home prices and wages plunge. I don’t see those things happening. Ergo, we’re going to see more here.

Is inflation due to supply chain constraints in a narrow group of categories? Answer here is no. Price acceleration is broadening. Apparent shortages, resulting in higher price, is how supply/demand imbalances are reconciled in a market economy – even if it’s demand-side.
The comps for core inflation get easier going forward. 0.35% next month, but then 0.19%, 0.07%, 0.17%, 0.05%, 0.03%, and 0.10%. Core inflation is going to reach new highs into early 2022. And Median inflation is going to gradually accelerate too as inflation broadens.
Last month, the CPI was high but it really WAS mostly about Used Cars. This month is lower, but it’s more worrisome because of the broadening of inflation pressures. I think there’s no turning back now. Inflation expectations are going to be broken.
Will the Fed care? I give a ‘taper’ sometime this year maybe a 50-50 chance, although I don’t think it will last very long since the moment that stocks and bonds soften, QE will be back. Every taper so far has led eventually to larger QE!
I give almost no chance of an actual hike in the overnight rate, for a very long time. I don’t think Powell or Brainard are going to turn into hawks – they may express alarm at inflation but they would be more alarmed by an equity bear market. Hope I’m wrong.
That’s all for today. Remember to download the Inflation Guy app. Tune into @TDANetwork at 1:45ET today. And register for the Simplify webinar tomorrow at https://us02web.zoom.us/webinar/register/5216230941517/WN_O20LE_xlRUOAe7ysdVBDnA Harley Bassman and Mike Green are the hosts! Busy busy Inflation Guy. Thanks for tuning in!

Well, I had said “the scariest number would be another 0.5% on core but without contribution from reopening categories.” We didn’t exactly get that; it was a little softer on core and some of the reopening categories still contributed. But not all of them. The number of inflating categories is getting broader, and shelter is starting to rise – although still very slowly, thanks to the continued eviction moratorium. All that means is that the rise in rents will be smeared over a longer period, and won’t really get started for a few months although I think there are starting to be clues in the data that shelter costs are percolating. With soft comps, this means that late Q3 and Q4 are very likely to see a sharp acceleration in core inflation. If we only average 0.3% m/m on core inflation, then by March (February’s print) core inflation will be at 5.4%, compared to 4.3% now.

Will that matter to the Fed? Until the people come with torches, probably not. However, these days – I wouldn’t count out the possibility of torch-bearing mobs.

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

Biden Changes the Rules of the Simulation

July 24, 2021 Michael Ashton Leave a comment

It’s like a classic Star Trek scene where we learn the true genius of Captain Kirk – what sets him apart from other great leaders.

SAAVIK: Sir, may I ask you a question?
KIRK: What’s on your mind, Lieutenant?
SAAVIK: The Kobayashi Maru, sir.
KIRK: Are you asking me if we are playing out that scenario now?
SAAVIK: On the test, sir, will you tell me what you did? I would really like to know.
McCOY: Lieutenant, you are looking at the only Starfleet cadet who ever beat the no-win scenario.
SAAVIK: How?
KIRK: I reprogrammed the simulation so it was possible to rescue the ship.
SAAVIK: What?
DAVID: He cheated!
KIRK: I changed the conditions of the test. I got a commendation for original thinking. …I don’t like to lose.

Star Trek II: The Wrath of Khan (See the scene here)

Kirk beat the no-win scenario by reprogramming the simulation. Now consider the parallels with the current situation, as Captain Biden paces the bridge.

The economy is booming: Q2 GDP is forecast to have advanced at an 8.5% annualized pace (the GDP report will come out Thursday). However, at the same time Initial Unemployment Claims have remained stubbornly high and many remain out of work. In the meantime, inflation has become the number one concern of consumers and they’ve stopped listening credulously to claims that the widespread price increases are “transitory” as company after company reports price pressures and shortages that go far beyond used cars! A single article in Fox Business listed Kimberly Clark (toilet paper products), Harley Davidson (motorcycles), Whirlpool (large appliances), General Mills (food), and Constellation Brands (beer and booze) as companies that have recently announced price increases under pressure from cost increases. And there are hundreds of others.

The Captain is also aware that the reaction to the new directly-deposited monthly stimulus checks, which is obviously meant to be a down payment on (and habituate taxpayers to) “universal basic income,” did not produce the expected accolades from the crew. To be blunt, it went over like a damp squib and morale is not good.

If the Administration increases spending even more, then the bottlenecks and shortages that have helped produce quarter-over-quarter inflation at a roughly 10% pace in Q2 are not going to get better. And if the Administration tries to reduce spending to take pressure off of product markets and some of the froth out of securities and asset markets, then growth could suffer (and employment, especially his own, could be at risk!). It’s a no-win scenario…unless…

So Biden broke out of the frame. He re-wrote the rules. He is going to spend an additional $4 trillion on infrastructure. But he is beating the Kobayashi Maru scenario, because this massive spending program is going to create jobs and heal the economy and also reduce inflation.

“If your primary concern right now is inflation, you should be even more enthusiastic about this plan,” Biden said in remarks from the White House State Dining Room. “These steps will enhance our productivity, raising wages without raising prices, and won’t increase inflation. It will take the pressure off of inflation.” – Captain Joe Biden

Genius.

Of course, it’s only possible if Biden succeeds in re-programming reality. Because in the world we actually live in, that’s not the way this works. Massive government spending programs, financed by feckless central bank financing of deficits, always leads to inflation.

The President’s claim – although, let’s be fair, he’s just reading cue cards so it’s someone else making the claim and forcing the poor guy to say the crazy things – is that by making “prudent, multi-year investments in better roads, bridges, transit systems and high-speed internet and a modern resilient electric grid, here’s what will happen: It breaks up the bottlenecks in our economy; goods get to consumers more rapidly and less expensively; small businesses create and innovate much more seamlessly.”

Let’s ignore for the nonce the government’s record of making “prudent investments.” And let’s be generous and imagine that the trillions and trillions of dollars of spending will actually result in the things he claims it will. It still doesn’t solve the problem, which is that right now there are massive supply issues, mostly because every consumer has more money now than they did before the shutdown and they’re spending it. There’s too much money chasing too few goods, today! As far as I can ascertain, prices are not shooting higher because the nation’s bridges aren’t good enough, and the internet isn’t fast enough. But even if they were, pushing more cash into the economic system to solve that problem years in the future makes today’s problem worse. The fact that this spending is not being done by the private sector but by the public sector compounds the mistake.

The only way to get the results he wants is to re-write the simulation so that it doesn’t work this way. So I assume that’s what he has done. (I would say, as David does in the script above, “he cheated”, but that evokes other things we aren’t supposed to talk about these days.)

Well done, Captain Joe!

Categories: Uncategorized Tags: inflation, infrastructure

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

June 23, 2021 Michael Ashton 2 comments

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

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

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

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

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

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

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

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

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

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

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

Categories: Uncategorized Tags: Fed, inflation

Summary of My Post-CPI Tweets (June 2021)

June 10, 2021 Michael Ashton 1 comment

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

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

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

Core highest since June 1992.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Summary of My Post-CPI Tweets (May 2021)

May 12, 2021 Michael Ashton 1 comment

Nice, sunny morning for #CPI here in the Northeast. Get ready for some fireworks today! I honestly can’t remember a time when a wider range of potential prints was not only possible, but plausible.
Last month, we saw a significant upside surprise as core inflation came in at +0.34% m/m. Yet, at some level this isn’t a surprise to those of us who are buying things.
What was really interesting about last month is that some of the big movers we expected – most notable among them used cars – did nothing special (Used Cars rose 0.55% m/m, yawn).
And yet, the upside surprise was also not in housing. Rents remained soft (more on that in a minute). So Median CPI, which we focus on more, was actually only +0.15% m/m.
Think about that…what that means is that the inflation surprise last month was due to large moves in smaller components – ones that no one expected to jump. If that doesn’t describe what inflation feels like in the real world, I’m not sure what does.
So turning to this month and the months ahead. We’re still waiting for rents (both primary rents and OER) to reflect the heat in the housing market and in the meteoric rise in asking rents.
My premise is that the abrupt and unusual divergence here is caused largely by the CDC’s eviction moratorium from last August, which has been extended several times – but which was recently vacated by a judge as being an overreach by the CDC.

I don’t know if that’s the last word, but in any case I wouldn’t expect that to have an effect THIS month. If we see a larger rise in rents, it’s organic from the general frothiness in housing and probably not from this effect, yet.
Also, we’re watching for used cars to catch up to private surveys. That’s a huge effect. Used Cars is 2.75% of the CPI, and New Cars has also seen upward pressure (it’s another 3.75%). That could easily add 0.1%-0.2% to core this month by itself.

There are lots of other places we may see pressure. There are shortages of containers, shipping, drivers, packaging, semiconductor chips, cotton, chlorine, ketchup, lumber, and the list goes on. Many of those categories are upstream to a LOT of consumer products.
Moreover, let’s not forget that there is a shortage of labor in certain sectors of the service economy. We haven’t gotten the Atlanta Fed Wage Tracker this month, but Average Hourly Earnings showed a big jump. That also feeds into consumer prices.
So economists this month are calling for 0.3% on core CPI, which thanks to base effects would move y/y to 2.3%. Given the usual CPI/PCE spread, that means we’d basically be at the Fed’s long-term target, FWIW.
This is much better than last month’s guess from the economists’ models, but with used cars alone I think you ought to be looking for that much. There are forecasts out there for +0.4% and even a few at +0.5%. Big shops, not people looking for notoriety.
That’s really not crazy at all. In fact while the Street consensus is 0.3%, the inflation derivatives market is closer to 0.4% as the NSA print traded yesterday several times around 265.9 (0.1% higher than the economists’ 265.6 guess).
Last month, the interbank market was also 0.1% higher than the economists, and they were right. FWIW the inflation market feels long to me, but there’s a lot of slower money at play too so the usual hedge-fund-flush MAY not necessarily follow any disappointment.

Regardless of what happens, the Fed will say transitory, and perhaps they are right. But either way, it’s economic volatility and that benefits no one (unless you’re long convexity). Not investors, and certainly not consumers. Good luck out there. 8min until #CPI.

Bug, meet windshield.
Core CPI +0.92% m/m. Yes, you read that right. Waiting for someone to say misprint. 2.96% y/y.

Incredibly this has nothing to do with rents. That’s amazing. A big move like that in core…hard for it not to involve rents. Primary Rents +0.20% m/m. OER +0.21% m/m. Ham-on-rye rent numbers as they say.
But Used Cars were +10.0% m/m, which means that series basically caught up to the private surveys in a single month. The good news is that removes some of the dry powder for future months.

These charts are comical. This is core goods (+4.4% y/y) and core services (a mere +2.5%).

The last time Core Goods was as high as +4.4% y/y was in 1991.
Airfares +10.2% m/m, which is part of that services jump. Lodging away from home +7.7%. Those are Covid/reopening categories.
Apparel as a whole was +0.32% m/m. It’s a small category but I’d been wondering why it had been so tame given that there was an embargo on certain Chinese cottons – I would have thought we’d have seen more.
In Medical, Pharmaceuticals were +0.63% m/m; Doctor’s Services ebbed a bit (-0.29% m/m) and Hospital Services was tame (+0.18% m/m).
A lot of my tweets are proceeding slowly because I have to check the numbers. Plus all of the charts re-scaled. Core ex-shelter is +3.57% y/y. Hasn’t been over 2% since 2012. Not over 3% since 1995.
OMG I buried the lede. Core CPI isn’t quite at 3%, though it rounded there. It hasn’t been ABOVE that since 1995. A quarter-century.

Core ex-shelter.

Sorry for the lag folks. My computers are literally throwing up on this data.
Interestingly, CPI for New Cars was only +0.26% m/m. In New Cars, there’s simply a shortage brewing but sticker prices haven’t risen very much. I think that’s a “yet”. The shortage is due partly to the shortage of chips of course.
OK, I am going to have to stop this here without a whole bunch of other stuff that is going to be great to look at…when my java/SQL connection decides to work. Here’s the bottom line though:
Core inflation at +0.9% is so outrageous that ironically the Fed will have an easier time ignoring it for now. And there were some things that we expected to catch up over multiple months, that caught up all at once. BUT there are also some things yet to come. >>
If primary and OER rents catch up merely to where they ought to be given historical relationships to asking rents, home prices, etc, then that’s another 1% or thereabouts on core CPI. And that’s harder to assume away than a used car spike. >>
But what we know is that next month, we will have the first core CPI y/y above 3% in more than a quarter-century. Because we still have one more easy comp from May. But we always knew this would be hard to read – and the smoke won’t clear until late this year.
Transitory? Better hope so. If not, look out below on stocks and bonds. That’s all for today. Thanks for tuning in and sorry I didn’t have more of my usual charts. If I get stuff working I may post them later.

Today’s month-over-month core CPI reading was the largest monthly figure since…wait for it…1981. That’s right, four decades ago. Yes, some of these things are going to be transitory. But they’re also going to be reprogramming consumers’ expectations. I’ve never been a big fan of the idea of anchored inflation expectations but as I wrote recently in “Once Again, You Ain’t Getting No Coke” whatever behavioral anchor there may have been is definitely threatened when there are large changes in prices.

Now let me add back a couple of the charts that I normally include, and maybe a couple of others. Here are the four-pieces charts. Each of these pieces is 1/5^th to 1/3^rd of the CPI consumption basket. There are lots of ways to cut the data but this is one I find useful. The first piece is Food & Energy. Little noticed in all of the craziness about core is that food and energy prices are also increasing markedly. Indeed, some food prices are rising as fast or faster than they did back when rising food prices helped spark the “Arab Spring.” Are we surprised at the unrest in Gaza? Get ready for more of that.

Second piece is core goods. Big piece of this is used cars. Kind of strange that new cars haven’t yet shown much of an uptick. The driver (no pun intended) of used cars is not just the huge tide of money of course, but also the smaller stock of used cars since rental fleets last year were shrunk a lot due to COVID. And rental car fleets are a big source of used cars.

Core services less rent-of-shelter is the third piece. Airfares, lots of personal services like child care, moving and storage, domestic services, etc. In a way, that’s a surprising piece here since this isn’t a raw materials gig, at least directly. But these services use packaging materials, cleaning materials, and other items whose prices are rising – and so are wages.

Finally, Rent of Shelter. The big bounce here is in Lodging-Away-from-Home, which was part of what was dragging it down. But rents themselves remain soft in the CPI, which I have to repeat is at odds with lots of the other ways we measure the cost of housing. This doesn’t mean that the CPI is ‘manipulated’; these discrepancies arise from time to time and we have a good reason to believe this is related to the eviction moratorium. I’m very confident rents will reconverge higher.

Now, because housing hasn’t lurched higher yet the median inflation figure will not be too bad. +0.3% m/m or so is what we’re likely to see, raising y/y to 2.17% or so. To be sure, +0.30% on median CPI is a big number for that series but not unprecedented. So today’s report is one reason that I always admonish people to look at median, not core. Core inflation is not going to rise at 11% this year. But remember the microwave-popcorn analogy: these one-off anecdotes are the way inflation is really experienced in practice. Maybe not 50% increases in used car prices, but a pop here and a pop there. This shows up as fatter tails on the high side of the distribution as opposed to the low side of the distribution when we are in a disinflationary environment. In an inflationary environment, we expect core inflation to be above median inflation because of those recurring “one-off” events. And, for the first time in a very long time, it is.

Finally, one more chart here and that’s of the EI Inflation Diffusion Index, which attempts to measure how widespread price increases are. It just peeked above zero for the first time since 2012. It keeps more distribution information than the median does, which is why it tends to rhyme with median but sometimes diverges.

Now let me sum up: the Fed doesn’t care. Oh, I am sure there are people at the Fed who will be alarmed, but the bottom-up people will see anecdotes and long-tails and not be worried. It’s the top-down people who are alarmed: the people who see money growth over 20% and have been bracing for what has historically always accompanied such money growth. But those people have no voice at the Fed. The main power around the table is concerned about making sure the unemployment rate is as near zero as possible. It’s an odd reversal from the Greenspan (and earlier) days, when the Fed believed that the way to maximize employment in the long run was to hold inflation low and steady. The Federal Reserve today behaves as if the best way to hold inflation low and steady in the long run is to maximize employment in the short run. That’s obvious nonsense, but here’s the important point: the crazy volatility of the economic data around COVID and in the base effects post-COVID create a fog of war that means it will be late 2021, and maybe even into 2022, before it will be clear to everyone that inflation is really settling down at a level higher than it was pre-COVID. Before then, the stock and bond markets are likely to discount worse price/rate conditions, which if anything will trigger even looser policy from the central bank.

In other words, by the time the Fed decides that cooling off price increases is more important than goosing the economy or the stock market, we will be very far down the road of squandering the Volcker Dividend. Behave accordingly.

Categories: Uncategorized Tags: CPI, inflation

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