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Summary of My Post-CPI Tweets

December 17, 2014 Leave a comment

Below is a summary of my post-CPI tweets. You can follow me @inflation_guy :

  • 1y inflation swaps and gasoline futures imply a 1-year core inflation rate of 0.83%. Wonder how much of that we will get today.
  • Very weak CPI on first blush: headline -0.3%, near expectations, but core 0.07%, pushing y/y core down to 1.71% from 1.81%.
  • Ignore the “BIGGEST DROP SINCE DECEMBER 2008″ headlines. That’s only headline CPI, which doesn’t matter. Core still +1.7% and median ~2.3%
  • Amazing how core simply refuses to converge with median. Whopping fall in used cars and trucks and apparel – which is dollar related.
  • Core services +2.5%, unch; core goods -0.5%, lowest since 2008. But this time, we’re in a recovery.
  • Medical Care Commodities, which had been what was dragging down core, back up to 3.1% y/y. So we’re taking turns keeping core below median.
  • Core ex-housing declines to +0.800%, a new low.
  • That’s a new post-2004 low on core ex-shelter.
  • Accel major groups: Food, Med Care (22.5%) Decel: Housing, Apparel, Transp, Recreation, Educ/Comm, Other (77.5%). BUT…
  • But in housing, Primary Rents 3.482% from 3.343%, big jump. Owners’ Equiv to 2.707% from 2.723%, but will follow primaries.
  • Less-persistent stuff in housing responsible for decline: Lodging away from home, Household insurance, household energy, furnishings.
  • Real story today is probably Apparel, which is clearly a dollar story. Y/y goes to -0.4% from +0.6%. Small weight, but outlier.
  • Similarly used cars and trucks, -3.1% from -1.7% y/y (new vehicles was unch at 0.6% y/y).
  • On the other hand, every part of Medical Care increased. That drag on core is over.
  • Curious is that airfares dropped: -3.9% from -2.8%. SHOULD happen due to energy price declines, but in my own shopping I haven’t seen it.
  • I don’t see persistence in the drags on core CPI. There’s a rotation in tail-event drags, which is why median is still well above 2%.
  • We continue to focus on median as a better and more stable measure of inflation.
  • Back of the envelope calc for median CPI is +0.23% m/m, increasing y/y to 2.34%. Let’s see how close I get. Number around noon. [Ed. note: figure actually came in around 0.15%, 2.25% y/y. Not sure where I am going wrong methodologically but the general point remains: Median continues to run hotter than core, and around 2.3%.]

Quite a few tweets this morning! The number was clearly roughly in-line on a headline basis: gasoline prices have dropped sharply, in line with crude oil prices. How much? Motor Fuel dropped from -5.0% y/y to -10.5% y/y. The monthly decline was over 6%, and so a decline in headline inflation on a month/month basis was all but certain. Had core inflation been as low now as it was in 2010, we would have seen a year-on-year headline price decline (as it is, headline CPI is +1.3% y/y).

However, core inflation is not as low as it was in 2010. It continues to surprise us by failing to converge upwards to median CPI. Last year, the reason core CPI was inordinately low compared to the better measure of central tendency (median) was that Medical Care inflation was weak thanks to the effects of the sequester. But that effect is now gone. Medical Care inflation is back to 2.5% on a year-on-year basis; this month’s print was the highest in over a year. The chart below (Source: Bloomberg) shows the y/y change in Medical Care Commodities (e.g. pharmaceuticals) – back to normal.

medcarecommod

The 2013 dip is very clear there, and the return to form is what we expected, and the reason we expected core inflation to return to median CPI. But it hasn’t yet; indeed, core is below median by around 0.6%, the biggest spread since 2009. Now, it may be that core is simply going to stay below median for an extended period of time as one category after another takes turns dragging core lower. From 1994-2009, core was almost always lower than median. That was a period of disinflationary tendencies, and the fact that different categories kept trading off to drag core CPI lower was one sign of these tendencies.

I do not think we are in the same circumstances today. Although private debt levels remain very high (weren’t we supposed to have had deleveraging over the past six years? Hasn’t happened!), public debt levels have risen dramatically and the latter tends to be associated with inflation, not deflation. Money supply, especially here in the US, has also been growing at a pace that is unsustainable in the long run and it seems unlikely that the Fed can really restrain it until they drain all of the excess reserves from the system. These are inflationary tendencies. The risk, though, is that the feeble money growth in Europe could suck much of this liquidity away and move global inflation lower. This is an especially acute risk if Japan’s monetary authorities lose their nerve or if other central banks rein in money growth. In such a case, global inflation would decline so that, while US inflation rises relatively, it falls absolutely. I don’t consider this a major risk, but it is a risk which is growing in significance.

Of course, all of that and more is priced into inflation-linked bond and derivative markets, as well as in commodities. Only a massive and inexplicable plunge in core inflation could render the market-based forecasts correct – and there is no sign of that. Housing inflation continues to rise, and the soonest we can see that peaking is late next year. Getting core inflation to decline appreciably while housing inflation is 2.6% and rising is very unlikely! Accordingly, we see inflation-linked assets as extremely cheap currently.

Growth-Sapping Effect of the Minimum Wage

December 10, 2014 1 comment

I just saw this interesting article in Econbrowser called “New estimates of the effects of the minimum wage.” It is both good news, and bad news.

It is good news because it clarifies a debate about the effect of the minimum wage which has been raging for a long time, but without much actual data. This article summarizes a clever approach by a couple of academic economists to examine the actual effects of increasing the minimum wage. The research produces solid numbers and confirms some theories about the effects of the minimum wage.

The bad news is that the effect of the minimum wage is just what theory says it should be, but liberal politicians have insisted isn’t true in practice. And that’s a net negative effect on overall welfare, albeit divided between winners and losers. However, even that ought to be good news, because this analysis also means that we can reverse the policy and reap immediate gains in consumer welfare.

First, the theory: microeconomics tells us that an increase in the minimum wage, if it is above the equilibrium wage for some types of labor, should decrease employment while increasing the wages of those who actually retain their jobs. (The usual argument for increasing the minimum wage is that the people who earn minimum wage aren’t making enough to live on, and supporters tend to forget that if people lose their jobs because the minimum wage is raised, then those people are making even less.) We often say things are “Econ 101,” but this really is Econ 101 in the sense that it is taught in every introductory economics class. There is no excuse not to know this:

sdoflaborIn the chart above, the supply of labor is S and the demand for labor is D. In the absence of a floor (minimum wage), the clearing wage and quantity of jobs is at the intersection; at a minimum wage of a, however, there is a shortage of jobs equal to c-b. If the minimum wage is raised to a’, then the shortage of jobs increases to c’-b’. The question for society is whether the increase in joblessness is an acceptable cost to accept, in order to increase the minimum wage from a to a’. (Of course, the political calculation might also include the fact that people who become unemployed will be supported by the welfare state, and potentially vote to preserve and expand those public institutions that constitute it).

The problem for those who argue against the minimum wage, or for it being increased, is that they can point out this economic truism until they are blue in the face, while the other side simply says “nuh-uh” and denies it is true with the same fervor that they insist that Obamacare has actually lowered premiums and deductibles. The façade only cracks, maybe, when actual data is presented that shows the argument to be bankrupt.

This academic study does that cleverly, by examining changes in employment and wages in states where the federal minimum wage was binding (because the state minimum wage was lower, or non-existent) and states where it was not binding (because the state minimum wage was higher, so the federal minimum wage didn’t matter). Their conclusion:

“Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.”

That’s the sterile conclusion. Now let’s count the cost. Between July 2007 and December 2009, the national employment-to-population ratio (which is similar to, but not the same as, the labor force participation rate) declined from 62.7% to 58.3%; it has since risen to 59.2%. As the chart below (source: Bloomberg) shows, the labor force participation rate (in yellow) shows a more gradual decline but no recovery – as has been well-documented.

labor

Now, some numbers. In November, the Civilian noninstitutional population (the denominator for the employment-to-population rate) was reported by the Bureau of Labor Statistics (BLS) to be 248,844,000. That means that if the authors are correct, the minimum wage has boosted the wages of unemployed workers at the bottom of the scale at the cost of about 1.74 million jobs (0.007 * 248,844,000).

Imagine what having another 1.74 million workers would do for GDP? Do you think it could make a difference for one of the worst recoveries on record?

It probably isn’t fair to assume that all of those 1.74 million workers is currently “unemployed” by the BLS definition. Many of them are likely not looking for work, in which case they would not be counted as unemployed. It is interesting to note, although surely spurious, that the series “Not in Labor Force, Want a Job Now” is about 1.7 million higher than would be expected given the unemployment rate (see chart, source BLS).

wannajobAlternatively, we could consider what it would mean to the Unemployment Rate if those 1.74 million workers were employed. This means they would also be in the Civilian Labor Force, so the participation rate (see above) would be 63.5% rather than 62.8%. If instead of coming from the “Not in Labor Force, Want a Job Now” group they came from the “Unemployed” group, the Unemployment Rate would be 4.7% instead of 5.8%. (Personally, I think that most of them are probably in the former category, as the Unemployment Rate has declined at approximately the rate we would expect from past recoveries, despite tepid GDP growth.) That is not inconsistent, of course, if GDP growth is lower because the labor force is simply smaller than it should be – and that is exactly the implication of this bit of research.

Again, the good news is that we can help the country and the downtrodden “structurally” unemployed with the same simple policy: reverse all increases in the Minimum Wage that have happened since 2007.

Summary of My Post-CPI Tweets

November 20, 2014 Leave a comment

Below is a summary of my post-CPI tweets. You can follow me @inflation_guy.

  • CPI +0.0%, +0.2% on core. Above expectations.
  • Core 0.203% before the rounding to 1 decimal place. So this didn’t “round up” to 0.2%. Y/y core at 1.82%, versus 1.7% expectations.
  • Today’s winners include Treasury, who is auctioning a mess of TIPS later.
  • Today’s losers include everyone shorting infl expectations last few months. Keep in mind median CPI > 2.2% so this is not THAT shocking.
  • Core services +2.5%, core goods -0.2%. Both higher (y/y basis) than last month.
  • Fed will be considered a “winner” here since y/y core moves back toward tgt. But in fact losers b/c median already near tgt & rising.
  • Accel major groups: Housing, Apparel, Medical, Recreation, Other. Decel: Transp, Educ/Communication. Unch: Food/Bev.
  • ex motor fuel, Transportation went from 0.6% y/y to 0.7% y/y.
  • Housing: primary rents 3.34% from 3.29%. OER 2.72% from 2.71%. Lodging away from home was big mover at 8.4% from 5.0% (but small weight).
  • Within medical care, medicinal drugs decelerated from 3.08% to 2.77%; but hospital & related svcs rose to 3.91% from 3.47%.
  • Core CPI ex-housing still rose, from 0.88% (a ten-year low) to 0.95%.
  • Primary rents to us look like they should still be accelerating, and are behind pace a bit.
  • Really, nothing soothing at all about this CPI print, unless you were hoping to get inflation “back to target.”
  • Pretty feeble response in inflation markets to upside CPI surprise, but that’s likely because of the looming auction.

After several months of below-trend and below-expectations prints in core inflation, core inflation got back on track today. I must admit that I was beginning to get a big concerned given the multiple months of downside surprise (especially in September, when August’s core inflation figure printed 0.0%), but the solidity of Median CPI has always suggested that we should be getting close to 0.2% prints every month and so a catch-up was due.

It is also possible that median inflation could converge downward to core inflation, but quantitatively we would only expect that if the reasons for core inflation’s decline were that categories which tend to lead were heading lower. In this case, that wasn’t what was happening: most of what was happening to core inflation was self-inflicted, caused by sequester effects that pushed down medical care. So it was always more likely that core inflation would begin to converge higher than the other way around.

Some Fed speakers have recently been voicing concern about the possibility of an unwelcome decline in inflation from these levels. I am flummoxed about those remarks – surely, Federal Reserve economists are aware of median inflation and understand that there is absolutely no evidence that prices broadly are increasing more slowly than they were last year. No evidence whatsoever. But perhaps I should not malign Fed economists when the speakers may have other agendas – for example, the desire to keep interest rates as low as possible lest asset markets correct and cause a messy situation, and therefore to find reasons to ignore any signs that inflation is already at or near their target with upwards momentum.

Our forecast for median inflation has been slowly declining since the beginning of the year, when we expected something from 2.8%-3.4%. As of September, our forecast was 2.5%-2.8%. Median CPI today rose 0.21%, pushing the y/y figure to 2.29%. That’s the highest level since the crisis, just beating out the high from earlier this year and probably signaling a further increase. Our September forecast will not be far wrong.

coremed

Summary of My Post-CPI Tweets

October 22, 2014 Leave a comment

The following is a summary of my post-CPI tweets. You can follow me @inflation_guy (or follow the tweets on the main page at http://mikeashton.wordpress.com)

  • Core CPI +0.14%, close to rounding to +0.2%. An 0.2% would have caused a panic in TIPS, where there have been far more sellers recently.
  • y/y core to 1.73%, again almost rounding to 1.8% versus 1.7% expected. This just barely qualifies as being “as expected”, in other words.
  • Core services fell to 2.4%, but core goods rose to -0.3% y/y.
  • OER re-accelerated to 2.71% from 2.68% y/y. It will go higher.
  • really interesting that core goods did not weaken MORE given dollar strength. $ strength is overplayed by inflation bears.
  • Apparel went to 0.5% y/y from 0.0%. That’s the category probably most sensitive directly to dollar movements b/c apparel is all overseas.
  • Accel major groups: Food/Bev, Apparel, Recreation (24.1% of basket). Decel: Housing, Transp, Med Care, Educ/Comm (72.5%).
  • Though note that in housing, Primary rents rose from 3.18% to 3.29%, and OER from 2.68% to 2.71%, so weakness is mostly household energy.
  • That’s a new high for primary rental inflation. Lodging away from home also went to new high, 5.04% y/y. But it’s choppier.
  • Airfares continued to decelerate, -3.01% from -2.71%. Ebola scares can’t have helped that category, which most expected to rebound.
  • But these days, airfares are very highly correlated to fuel prices (wasn’t always the case). [ed note: see chart below]
  • In Medical Care, pharmaceuticals rose to 3.08% from 2.72%. But the medical services pieces decelerated.
  • Decel in med services is the surprise these days as the passage of the sequester cause positive base effects.
  • The weakness in med services holds down core PCE, too. Median CPI continues to be a better measure as a result.
  • College tuition and fees 3.36% from 3.32%. Still low compared to where it’s been. Strong markets help colleges hold down tuitions.
  • Core CPI ex-housing partly as a result of continued medical care weakness is down to a new low 0.877% from 0.911%.
  • That continues to be the horse race: housing versus a wide variety of other things not inflating. Yet.

We may hear about how this CPI report shows that there is “still no inflation,” but the simple fact is that the report was a little stronger-than-expected, that shelter inflation continues to accelerate with no end in sight, and that there was no large effect seen in core inflation from the strength of the dollar. The dollar has an evident effect on energy commodities, and a lesser effect on other commodities, but once you get to finished goods it takes a larger FX move or one longer in duration than the modest dollar rally we have had so far to cause meaningful movements in inflation.

The dollar’s strength, reflecting in energy weakness, also shows up in some categories where we don’t fully appreciate the link to energy. The airfares connection is always one of my favorites to show. Prior to 2004, there was basically no correlation between airfares and jet fuel prices (vertical part of the chart below). After 2004, the correlation went to basically 1.0 (see chart, source Enduring Investments).

jetfuel

The real conundrum in the CPI right now is the medical care piece. We always knew there would be difficulties in extracting what is really going on in medical care once Obamacare kicked in, because many of the costs of that program don’t show up immediately as consumer costs. But the main effect in the data all last year was the effect of the sequester on Medicare payments, which pushed down Medical Care inflation from over 4% in mid-2012 to 2% in 2013. But as the sequester passed out of the data, Medical Care CPI rose to nearly 3% earlier this year…and then slipped, abruptly, back to the lows (see chart, source Bloomberg).

medcareyoy

Is it possible that Obamacare is really restraining consumer inflation for medical care? Sure, it is possible. But there is far too much noise at this point to know what is happening in that component. And it really matters, because the overweighting of medical care and underweighting of housing in core PCE is the main reason that the Fed-favored price index shows 1.5% while median CPI is at 2.2%, within a snick of the highs since the crisis (see chart, source Bloomberg – note median CPI isn’t out yet for September).

pcemedian

From a markets perspective, the TIPS market (and the commodities market, for that matter) have been pricing in a pernicious disinflation and/or deflationary pressure. It is simply not there. And so, even with a print that couldn’t reach 0.2% on core, and even heading into a big auction tomorrow, inflation breakevens are rallying nicely, up 3.5-4.5bps across the board. Imagine what they would have done with a print that was a bona fide strong print!

Ugly CPI

September 17, 2014 Leave a comment

Here is a summary of my post-CPI tweets. You can follow me @inflation_guy or (if you’re already following me on Twitter or seeing this elsewhere) subscribe to direct email of my free articles here.

  • Complete shocker of a CPI figure. Core at +0.01%, barely needed any rounding to get to 0.0. Y/y falls to 1.73%. Awful.
  • Zero chance the Fed does anything today, anyway. The doves just need to point to one number and they win.
  • Stocks ought to LOVE this.
  • Core services dropped to 2.5% y/y from 2.6% and core goods to -0.4% from -0.3%.
  • Accelerating major groups: Food/bev. That’s all. 14.9% of basket. Everything else decelerating.
  • I just don’t see, anecdotally, a sudden change in the pricing dynamics in the economy. That’s why this is shocking to me.
  • Primary rents to 3.18% from 3.28%. Owners’ Equiv to 2.68% from 2.72%. Both in contravention of every indicator of market tightness.
  • Apparel goes to 0.0% from +0.3% y/y. That’s where you can see a dollar effect, since apparel is mostly manufactured outside US.
  • Airline fares -2.7% versus -0.2% y/y last month and +4.7% three months ago. It’s only 0.74% of the basket but big moves like that add up.
  • Medical care: 2.09% versus 2.61% y/y. Now THAT is where the surprise comes in. Plunge in ‘hospital and related services.’ to 3.8% vs 5.5%.
  • …we (and everyone else!) expect medical care to bounce back from the sequester-inspired break last year. I still think it will.
  • core inflation ex-housing at 0.91% y/y, lowest since August 2004. Yes, one decade.
  • core inflation ex-housing is now closer to deflation than during the deflation scare. In late 2010 it got to 1.08% y/y.
  • Needless to say our inflation-angst indicator remains at really really low levels.
  • Interestingly, the proportion of CPI subindices w y/y changes more than 2 std dev >0 (measuring broad deflation risk) still high at 38%.
  • To sum up. Awful CPI nbr. Housing dip is temporary & will continue to keep core from declining much. Suspect a lot of this is one-off.
  • …but I thought the same thing last month.
  • Neil Diamond said some days are diamonds, some days are stones. If you run an inflation-focused investment mgr, this is a stone day.
  • Interestingly, Median CPI was unchanged at 2.2% this month. I’d thought it fell too much last month so this makes sense.

I am still breathing heavily after this truly shocking number. This sort of inflation figure, outside of a crisis or post-crisis recovery, is essentially unprecedented. Lower prints happened once in 2010, once in 2008, three times in 2003, and once in 1999. But otherwise, basically not since the 1960s.

The really amazing figure is the core-ex-Housing number of 0.91% y/y. A chart of that (source: Enduring Investments) is below.

corexshelter

There are interesting similarities between the current situation and late 2003, which is the last time that ex-housing inflation flirted with deflation. Between late 2000 and June 2003, money velocity fell 11%, in concert with generally weakening money growth. Velocity fell primarily because of a sharp decline in interest rates from 6% on the 5y note to around 2.25%. The circumstances are similar now: 5y interest rates declined from around 5% to 0.5% from 2006 through mid-2013, accompanied by a 24% decline in money velocity. And voilá, we have weakness in core inflation ex-housing.

The important differences now, though, are twofold. The first is that the absolute levels of money velocity, and of interest rates, are much lower and very unlikely to fall much further – indeed, money velocity is lower than it “should” be for this level of interest rates. And the second is that there is an enormous supply of inert reserves in the system which will be difficult to remove once inflation begins to rise again. The Fed began to increase interest rates in 2004, which helped increase money velocity (and hence, inflation) while it also caused M2 growth to decline to below 4% y/y. Core inflation rose to 3%, but the Fed was basically in control. Today, however, the Fed has no direct control over the money supply because any reserves they remove will be drawn from the “excess” reserves held by banks. This will make it difficult to increase overnight rates except by fiat (and increasing them by setting a floor rate will merely cause money velocity to rise while having no effect on the money supply). So the ‘potential inflation energy’ is much higher than it was in 2003. As an aside, in 2004 I was quite vocal in my opinions that inflation was not about to run away on the upside, which is another key difference!

If you are a tactical inflation trader, today’s CPI figure should make you despise inflation-linked bonds for a few weeks. But they have already taken quite a drubbing this month, with 10-year breakevens falling from 2.27% to 2.08% as I type. It’s okay to watch them fall, tactically, especially if nominal bonds generally rally. But strategically, not much has changed about the inflationary backdrop. I don’t expect airline fares to continue to drop. I don’t expect Medical Care inflation, which has a strong upward bias due to base effects, to plunge further but to return to the 3%-4% range over the next 6-12 months. And Housing inflation slowed slightly this month but remains on course to continue to rise. So, if you are considering your inflation allocations, this is a good time to increase them while markets are dismissive of any possibility of higher prices.

Without a doubt, today’s number – especially following another weak CPI print last month – is a head-scratcher. But there aren’t a lot of downside inflation risks at the moment. Our forecast had been for core (or median) inflation to reach 2.6%-3.0% in 2014. I would say that core CPI isn’t going to get to that level this year with 4 prints left, and even median CPI (which is a better measure right now of the central tendency of inflation, thanks to the aforementioned base effects in medical care, and remained at 2.2% this month) is going to have a harder time reaching that target. I’d lower and narrow the target range for 2014 median inflation to 2.5%-2.8% based on today’s data.

Summary of My Post-CPI Tweets

Below is a summary of my post-CPI tweets today. You can follow me @inflation_guy.

  • Weak cpi: 0.1%, core +0.1%. Unrounded core was +0.096, so it rounded UP to 0.1%. Y/y core stayed at 1.9% but just barely: 1.85%.
  • That’s a real surprise since virtually all signs had been for higher core going forward. Breakdown will be interesting.
  • Core svcs y/y slipped to 2.6%; core goods fell further to -0.3%. Leading indicators on both still point higher though.
  • Accel major groups: Food/Bev, Housing (56.3%). Decel: Apparel, Transp, Recreation, Other (29%). Unch: Med Care, Educ/Comm (14.7%)
  • Primary Rents 3.28% from 3.15%. OER 2.72% from 2.64%. No danger of inflation declining while these are rising strongly.
  • Dramatic fall in airline fares: from 5.34% y/y to -0.25%.
  • Airline fares are only 0.74% of the basket but that took 0.04% from headline and 0.05% from core.
  • Big move in one item suggests median CPI won’t fall, though I haven’t yet done the math. In any event, number not as weak as I thought.
  • Medicinal drugs 3.12% from 3.00%. Med equip/supplies 0.2% from -1.08%. Much of this is unwind of sequester effect last yr.
  • Easy comparison next month means core will be back to 1.9% in August, chance of 2.0%. It needs to converge with median!
  • I think Median CPI might actually accelerate today from 2.3%, based on my rough calculations.

The initial headline was a bit of a shock, as it looked very weak. But as I looked deeper into the numbers, it didn’t seem nearly as weak as I had first thought. To be sure, this is not a strong report, but the seeming weakness came largely from one component. The most-important components (and the ones with the most inertia) are the housing pieces, and those are moving strongly ahead.

When I did my calculations of the median CPI (I don’t do it the same way as the Cleveland Fed does it), I came up with a decent rise over last month’s figure. That is to say that most categories continue to see accelerating inflation. We will see if the Cleveland Fed agrees, but an uptick in the median CPI (which was 2.3%, unchanged, last month) would go a long way towards removing any sense that this was actually a weak figure.

Summary (and Extension) of My Post-CPI Tweets

July 22, 2014 2 comments

Below is a summary (and extension) of my post-CPI tweets today. You can follow me @inflation_guy.

  • CPI +0.3%/+0.1% with y/y core figure dropping to 1.9%. That will be only by a couple hundredths on rounding, but it’s still a decline.
  • Looks like core was 0.129% rounded to 3 decimal places. y/y went from 1.956% to 1.933% so a marginal decline.
  • RT of Bloomberg Markets @themoneygame: Consumer Price Changes By Item http://read.bi/1nx0sUf 
  • Core goods still -0.2%, core services still +2.7%, unchanged from last month. [ed note: I reversed these initially; corrected here]
  • All of this a mild miss for the Street, which was looking for +0.19% or so, but I though the Street was more likely low.
  • Major groups accel: Apparel, Recreation, Educ/Comm, Other (19.7%). Decel: Food/Bev, Transp, Med Care (38.9%), Housing flat.
  • There’s your real story. Recent drivers: medical care, which is a base effect and oddly reversed. That’s temporary. Also>>
  • >>big fall in non-rental/OER parts of housing: insurance, lodging away from home, appliances. Those are not as persistent as rents.
  • Primary rents went to 3.153% from 3.058%; OER unch at 2.640% from 2.638%. The rest will mean-revert.
  • College tuition and fes at 4.142% from 4.001%.
  • 60.5% of all low-level categories accelerating (down from 70.5%). Still broad but not as broad.
  • Actually looks like Median CPI could downtick today.

This is why I try very hard to resist the urge to forecast the monthly CPI, and admonish investors (and even traders) to resist trading on the data. Chairman Yellen is right about this: the data are noisy, so one month can be almost anywhere. This month, there was a reversal in the recent rise in y/y medical care inflation. But that rise was due to base effects, which aren’t going away, so forecasting medical care inflation to continue to accelerate is more a statement of mathematical likelihood than it is an economic forecast. And it’s all the more surprising then when it reverses.

This month’s figure makes it a fair bit harder for my forecast of near-3% for 2014 on core or median inflation to come to pass, although it bears noting that median inflation (even though it may downtick later today) is still within striking distance. Since median is currently the better measure, and will be for much of this year, I won’t back off my forecast yet. Another weak month, though, would cause me to ratchet down the target simply because it becomes harder to hit as time becomes shorter.

However, I expect several months this year will exceed +0.3% on core inflation. And it is worth remembering that core inflation faces easy year-ago comparisons for the rest of the year. In July of last year, the seasonally-adjusted m/m core inflation figure was +0.167%; in August it was +0.138%; in September it was 0.132%; in October +0.124%; in November +0.175%; and in December +0.101%. So, even if core inflation only averages +0.2% for the rest of the year, core will still be at 2.3% by year-end. If core inflation averages what it has been for the last four months, we’ll be at 2.4%. What that means is that (a) my forecast of something near 3% doesn’t represent a massive acceleration, although we only have half a year to get there, and (b) anyone forecasting less than 2.3% by year-end is actually forecasting a deceleration in inflation from recent trends.

The breadth indicators also took a mild breather this month, with the proportion of the CPI that is accelerating (looking at low-level categories) dropping to around 60% from around 70% in May. As with the other analysis, however, we should be careful not to read too much into one month since this figure also jumps around a lot. Interestingly, the proportion of categories where the year-on-year change is at least 2 standard deviations above zero – so that we can reject the ‘deflation’ meme for these categories – is basically unchanged from last month at 24%. As the chart below shows, we last saw a level this high in 2006, which is also the last time that core CPI ran at 3%.

twosd

Housing inflation is now back below my model’s projections, inflation breadth is still high, and the persistent parts of CPI are maintaining their levels or advancing while a few of the skittish parts are retreating (or at least not yet converging to the mean). There is nothing here to indicate that the three months of accelerating core CPI were the aberration; in fact to me it appears that the June figure was the aberration. That question will be answered over the balance of the year. In the meantime, inflation markets remain priced at levels so low that even if you’re wrong in betting on higher inflation, you don’t lose much but if you’re right, you do very well. In my view (although admittedly I may be biased), most investors remain significantly underweight protection against this particular risk.

Categories: CPI Tags: ,
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