Writing from the Netherlands after visiting future clients this week; here is a summary of my post-CPI tweets (Follow me @inflation_guy) :
- very surprising core inflation, barely rounded up to 0.1% month/month. Waiting for breakdown, but Shelter was still +0.1% so something odd.
- Core CPI ex-shelter only 1.39%, not terribly far from the 2010 lows.
- …part of the answer is that core commodities decelerated further, -0.1% y/y. But core services, most of which is housing, ALSO decel.
- Major groups; Accel: Food/Bev (15.3%); Decel: Apparel, Transp, Medical Care, Educ/Comm (34.3%). Balance unch on y/y rate rounded to tenths.
- Housing actually accelerated slightly. So decline in core was apparel, Medical Care, Education, and non-fuel transportation. Hmmm.
- …If you believe core is going to keep falling, you DON’T want to bet on it being led lower by Medical Care and Education.
- We expect this to be the low print on core. Our forecast remains 2.6%-3.0% for 2013, but only 0.6% has been realized so far
- It wd probably be prudent to lower our 4cast range; we will if there is another miss lower in May. But not by much: housing still the driver
I think the sixth bullet is the key point: core inflation is drooping because of Medical Care and Education & Communication decelerating. This is terrific news, but there’s about forty years of history that should lead one to be skeptical that these are the categories that will lead inflation lower.
Our forecast for 2.6%-3.0% is based on an expected acceleration in rents, based on the recent rise in home prices. We’re not changing that forecast yet because our model didn’t expect the acceleration to happen yet. However, it should begin to happen in the next 1-3 months.
If primary and Owners’ Equivalent rents don’t begin to accelerate in the next month or two, we will lower our 2013 forecast simply because it will be difficult to see a sufficient acceleration to reach our goal with only a half year or so to go. But the reason we don’t lower our forecast much is that the primary driver here is still rents, and there is no question which way rent inflation is headed. Only if we conclude that for some strange reason there is going to be a permanent shift in the capitalization rate of owner-occupied housing (that is, if there is a permanent shift in the ratio of rents to prices from what it has historically been) would we reconsider the direction of our forecast, and then only if home prices stopped launching higher.
Meanwhile, weak growth numbers, soft inflation numbers, and the seeming success of the Abe program in Japan as growth there has abruptly surprised higher (although it cannot be attributable to the BOJ monetization, since that program hasn’t been around long enough to affect the real economy even if there is money illusion at work) ought to cause any silly talk about the “taper” of the Fed’s buying program. That was always due for enormous skepticism, but with all of the arrows pointing the wrong way there is almost no chance that the FOMC will elect to taper purchases in the next few months. Indeed, I would expect the “hints” of such action to cease in short order. The only reason to talk about it is to (a) convince the world that Fed policy is credible, but a ruling on that credibility won’t be made until the episode is over, based on results, not at this time and based on what they say; or (b) because there is little cost of doing so, since the markets won’t panic if there’s no chance of near-term implementation.
- upward surprise + upward revision in #Payrolls – not too shocking, as I pointed out in last article. Weak hours though…
- Here is part of what’s happening in #payrolls: more jobs, fewer hours = employers cutting back hours to avoid Obamacare coverage
- Question is, which is better for confidence? More jobs, lower earnings & wages, or fewer, but better, jobs? Probably the former.
- average weekly hours have stagnated since 2011, even as Unemployment has fallen.
Today’s Employment report was pretty straightforward: an upward surprise to payrolls and upward revisions; a decline in the Unemployment Rate, and declines in hours worked. The upward revisions to Payrolls is not really a surprise, although seeing the Unemployment Rate continue to decline when Consumer Confidence “Jobs Hard to Get” is increasing is unusual.
Two years ago, the “Average Hours Worked” was 34.4 hours and the Unemployment Rate was 9.0%. Today, average hours worked is still 34.4 hours and the Unemployment Rate is 7.5%.
What I said about Obamacare coverage should be expanded a bit. There have been anecdotal reports (see, e.g., here and here) that many employers are cutting back hours for some employees, because they are required to offer health insurance (at steep premium increases) to part-time employees working at least 30 hours per week. The incentives are large, especially for employers who are near the 50 employee cutoff, to cut back employee hours. The way this would show up in the data, if the behavior was widespread, would be (a) a decline in average hours, as more people work shorter shifts, and (b) potentially (but not automatically) an increase in the number employed, since an employer who cuts 100 hours of work from existing employees is now 10 hours short of the labor input needed. I suspect this is only partly the case – if you cut 100 hours, maybe you add three 25-hour part-timers (it still costs money to hire, after all) – but it may help explain why the payrolls number keeps rising and the jobless number keeps falling although the average hours worked is pretty stagnant.
It would also help resolve the conundrum between the “Jobs Hard to Get” survey result and the Unemployment Rate, although it is a small divergence at present. If respondents are answering the survey as if the question is whether good or full-time jobs are hard to get, it may well be the case that those jobs are getting more difficult to find while there are more part-time positions being offered.
This is mere speculation, and storytelling, but I think it’s plausible that this is happening and may be affecting the data.
Below is a summary of my post-CPI tweets. You can follow me @inflation_guy.
- Sigh.Not this month!Core #inflation +0.1%, waiting 4 data to see rounding. Big fall in apparel, & housing uptick not happening yet.
- Apparel decline most since April 2001. That will reverse.
- Core with rounding looks like 0.106%, 1.89% y/y. definitely weak. Will look at breakdown to see where.
- This is the most that y/y has been below our forecast track since January 2009!
- Core services fell from +2.6% y/y to +2.5%, but core goods fell to flat from +0.3%. Our thesis is that these will converge up, not down.
- Core goods is inherently harder to forecast. Core services is largely housing.
- Accelerating subgroups: Educ/Comm (6.8% of basket). Decel: Apparel, Transp, Food & Bev, Recreation (41.7%). Unch: Housing, Med Care, Other
- CPI drooping appears to be seasonal maladjustment. The Apparel burp itself is worth 0.04%.
- Housing – we’re still waiting for the upturn. This month primary rents rose to 2.81% from 2.74% y/y, Lodging Away from Home rose too.
- Owners’ Equivalent Rent (24% of CPI) fell to 2.083% vs 2.144%. Since Primaries are rising, probably just a lag issue. 1 or 2 more months.
- Apparel saw broad-based huge declines. Again, likely seasonal. Core decelerated 0.11%, and 0.06% of that was Apparel.
- Our forecast for full-year CPI doesn’t change as a result of this number. We’re still at 2.6%-3.0% on core for 2013.
I don’t want to overplay the Apparel card here. March is a big month for seasonal adjustment for Apparel, but it is possible that this marks the end of the two-year spike in Apparel prices. If it does, then it resolves one speculation I’ve had: that the rise in Apparel, after twenty years of flat-to-declining prices, indicated that in some areas the globalization dividend on inflation may have ended. It is far too early to say that speculation is wrong, especially with big seasonal adjustments in March. Prior to 1992, there were certainly setbacks in Apparel on a regular basis due to the difficulty in seasonal adjustment. So it’s too early to say this is wrong, but not too early to say it’s surprising. And, after all, there’s always the possibility that the screwy numbers were the last twenty-three of them, and not this one. But these are still the highest seasonally-adjusted Apparel prices we’ve had in March since 2001 (see chart, source BLS, below).
The small blip down in Housing is much less of a concern. Primary rents are still rising, and OER didn’t exactly decline aggressively. We’ve been waiting out a “flat part” in the lag structure – this just means we have to wait another month or two. The chart below is updated (multiple sources) through this morning.
None of this will help the commodities guys, nor the TIPS guys, in the short run. But it doesn’t change the big picture for inflation. It’s coming. We just have to wait another month or two for the evidence!
Here’s a summary of my post-CPI tweets:
- #CPI +0.7%/+0.2% ex food & energy. Y/Y core back up over 2% at 2.004%. And going higher.
- Gasoline prices +9.1%, so there you go for everyone who thought Jan’s number was low.
- Economists had been looking for a “soft” 0.2% on core core, and got it at +0.17% rounding up to +0.2%.
- y/y rise in Owner’s Equivalent Rent rose to 2.14%, a new post-2008 high. That’s on the way to 3% or 4% over the next 1-2 years, at least.
- Accelerating Major groups: whoa…EVERY major group accelerated y/y. All 8 of them. I’ve never seen that.
- Food & Bev: 1.625% from 1.558%. Housing 1.929% from 1.805%. Apparel 2.426% from 2.115%. Transp 2.361% from 0.712%.
- Recreation 0.890% vs 0.554%. Educ/Comm 1.740% from 1.622%. Other 1.803% from 1.574%. Only close one: Medical 3.107% from 3.095%
- #CPI didn’t surprise on the upside, but there is just nothing weak about this number. Anywhere.
- Well, core goods I guess. +0.3% from +0.4%. But core services went to 2.6%, mainly on housing strength. If core goods ever recover…
The mainstream media and many economists will yawn at this number and miss the big picture. There is just nothing important here that is weak. In particular, every major group accelerated on a year-on-year basis. That’s amazing. It’s not unprecedented, I am sure, but I don’t remember seeing it happen before. Usually some are accelerating, some are decelerating, even when inflation overall is accelerating or decelerating.
In particular, housing continues to quietly accelerate, as we’ve been predicting. It is going significantly higher.
Core inflation is going to accelerate further, although the next several months have solid year-earlier comparisons of +0.22%, +0.22%, +0.20%, and +0.21%. But we think we’ll see core inflation nevertheless accelerate over that time frame, and then there are six easy comparisons in a row with nothing above 0.17%. By year-end, we still think we will see core of 2.6%-3.0%.
You can follow me @inflation_guy!
There will be many more days ahead for the Fed, and many of them will have plenty of good news. It is a mistake to trya and read too much into one day’s economic releases. With that said, here is my attempt to do exactly that.
I tweeted the following real-time reactions (@inflation_guy) following the CPI release this morning:
- Ready for an exciting day…CPI, Claims, Philly Fed, a 30-year TIPS auction, wild commodity swings, 3 Fed Presidents…buckle up!
- Hello! Core inflation +0.3%, higher-than-expected. Look out above.
- Apparel +0.8%. Some will pooh-pooh the number on that basis, but Apparel has been trending higher for more than a year.
- To be fair, core inflation BARELY rounded up to +0.3%. But the market was looking for +0.16% or +0.17%.
- Core Services remains at +2.5% y/y, but core goods ticks up to +0.4%. The recovery of core goods has been something we’re looking for.
- Somewhat surprisingly, the +0.251% rise in core inflation did so without having a rise in Owners’ Equiv Rent. Went from 2.1% y/y to 2.08%
- Accel Inflation: Housing, Apparel, Educ/Commun, Other (54.7% of basket); Decel: Food/Bev, Transp, Med Care, Rec (45.3% of basket)
- In Transp, the drag was almost all fuel. New/used Cars, maintenance, insurance, airline fares, inter- and intracity transp all up.
- What’s amazing in the CPI today is how much it did with how little from the main driver of housing. That uptick is yet to come.
- …and, next month, headline will get upward pressure from the steep rise in gasoline, which also dampens discretionary spending.
The primary takeaway from the CPI release is this: yes, core inflation surprised a little bit on the high side. But it did so without the support of the main factor that I think will push core inflation almost certainly higher going forward: housing. Rents (both primary and OER) neither accelerated nor decelerated this month from the prior year-on-year pace. And yet, there is really no temporary factor that pushed inflation higher this month. It was fairly broad-based. Apparel stood out on the month-to-month change perspective, but here is the chart (source Bloomberg) on Apparel:
This month doesn’t appear to me as too much of a true outlier. The underlying dynamic there has simply changed.
So this month core inflation stayed at 1.9%; next month it is very likely to return to 2.0% as we are dropping off the weak February change from last year. And all of that, before the housing inflation hits the data.
Speaking of housing inflation, there is no sign yet of that abating. In today’s Existing Home Sales report, the year-on-year change in Median Existing Home Sales Prices rose to 12.61%, another post-2005 record, and the highest real price increase ever, outside of 2005. This is happening because the inventory of new homes has dropped to almost a record low – really! Sure, the chart below (source Bloomberg) ignores “shadow inventory,” but it is starting to look more like the inventory of new homes now.
Some of that is seasonal, but there’s no doubt that lower inventories are now helping the home pricing dynamic. And, as I’ve shown previously, the inventory of existing homes actually has a nice relationship with shelter inflation 1-2 years later (Source: Enduring Investments):
The current level of inventories translates into a 3.6% expected rise in CPI-Shelter over the course of 2014. So you see, we’re not only firing inflationary rounds but we’re also continuing to feed more ammunition into the gun for next year. Our model of housing inflation projects Owners’ Equivalent Rent no lower than 3% by year-end 2013. And if that happens, there is no way that overall core inflation is going to be at 2%.
Now, in addition to the bad news on prices and the news on home prices that are probably seen at the Fed as a guarded positive (after all, it means the mortgage crisis is essentially over as more borrowers will be ‘above water’ again every month hereafter), there was also a mild surprise on the high side from Initial Claims (362k versus 355k) and a bad miss on the Philly Fed index for February. This latter was expected at +1.0 after -5.8 last month; instead it dropped to -12.5. Philadelphia-area manufacturers have reported softening business conditions in three of the last four months, suggesting that December’s pop to +4.6 was the outlier. Now, there were similar one-month dips in August of 2011 and June of 2012, so we’ll have to see if it is sustained…but it is consistent with the report out of Wal-Mart and the worsening of business conditions in Europe.
Higher prices (and more coming, on the headline side, as retail gasoline prices have now risen in 35 consecutive days) and lower business activity. This is exactly the opposite of what the Fed wants. It has been a bad day at the Fed.
However, it is exactly what traditional monetarism expects: accommodative monetary policy leads to higher prices (check), and has no effect on real activity in the absence of money illusion (check). So score one point for Friedman today.
And so, what else would you expect after such a day? Bond yields are declining, inflation breakevens are narrowing, and industrial commodities (metals and energy) are sliding. As with so much else these days, that makes no sense, unless you just don’t know what’s going on. When we encounter these bouts with irrationality (or, more fairly, thick-headedness), the market can be frustrating for a long time – and the ultimate denouement can sometimes be jarring. As I said earlier in this post: buckle up!
Here are my post-Employment tweets, summarized and expanded on:
- Employment Report: Unemp Rate up to 7.923% from 7.849% – the consumer confidence report was the hint that’d happen.
- Always hard to look at the January Payrolls report especially. In addition to rockin seasonals, you get prior yr revisions.
- Avg Hourly Earnings +2.1% y/y, faster than any time in 2012. Wages lag inflation so this will be higher than this at year-end.
- …the bad news is that aggregate inflation will be higher as well.
- So after the benchmark revisions, avg 2011 payrolls gain was 153k. For 2012: 156k. Today: 157k. Nice stimulus.
- Nearly 5 years after the recession started, “Not in Labor Force, Want a Job Now” still near the highs.
Here is the BLS chart on the “Not in Labor Force, Want a Job Now” series.
And here is a chart (Source: BLS, Bloomberg) showing the trailing 12-months deficit (represented positive) versus Payrolls. You can see why there’s some reason to think the massive spending (blue line) curtailed further job losses in the recession, although it’s important to remember that we don’t know the counterfactual…that is, what would have happened in the absence of spending.
The graph does not imply that if the government had not run a huge deficit that we would have had continuing job losses, even though that is the tale our elected representatives would like you to believe. Indeed, look at the next chart, which shows the level of the deficit versus the 12-month acceleration/deceleration in job growth, lagged 12 months.
If there seems to be a correlation between big deficits and job market acceleration, it comes mainly from the big swings associated with the teeth of the crisis when the causality may have been going either direction. Take out that big “S” and you have similar jobs growth with huge government and with small government (and you can see that same fact on the prior chart).
The following is a summary of my post-CPI tweets. You can follow me @inflation_guy.
- Core CPI only 0.11% unrounded, 1.94% y/y. Large fall in apparel prices partly to blame.
- Suspect there may be some seasonal issues since last 3 months were weak in both 2011 and 2012.
- Key thing looking forward is that rents and OER both continue to motor higher…and no sign of stopping.
- also big drop in ‘lodging away from home.’ Always some quirky stuff out of 200 item indices, and I don’t like to ‘ex out’ everything.
- Core services inflation remains +2.5% y/y; core goods inflation drops from +0.7% to +0.5%.
- Owner’s Equiv Rent y/y went from 2.140% to 2.125%. Primary Rents went from 2.75% to 2.73%. That’s 30% of consumption right there.
- Accelerating: Food&Bev, Housing, Recreation (61.1%) Decel: Apparel, Transp, Med Care, Other (32.2%). Unch: Educ/Comm (6.7%)
- Transp fell because of Motor Fuel, of course. Apparel because Girls Apparel plunged. Really.
- Nothing here disturbs what we see as the underlying dynamic for inflation. Our 2013 forecast range for core remains 2.6%-3.0%.
Most forecasters are projecting a decline in core inflation over the next year. However, the chart below, which I’ve shown before, illustrates why almost a third of the consumption basket (and 40% of core inflation) is very likely to continue rising. Home prices and direct rents have responded very well to the Fed’s aggressive easing campaign, and (with a lag) the 5% rise in the FHI Home Price Index and the 11% rise in the median prices of Existing Homes are being reflected in primary rents and OER.
I’ve put together a little press release/summary that may be useful for journalists, as we’re trying to generate more exposure (and new client inquiry) in 2013 for Enduring Investments. Please drop me a line if you know of someone in the media who ought to be on that list!
The following are my post-Payrolls tweets (@inflation_guy), along with some charts and added thoughts.
- Payrolls number close, expected 85k was actually 146k but 49k of downward revisions. Amazingly good guesses given Sandy.
- Unemployment Rate drops to 7.746% from 7.876% (so really 0.1 drop not 0.2 drop), due to sharp particip drop to 63.6 from 63.8
- Not a particularly good report; haven’t had >200k jobs since March, after these revisions. But chatterverse will say it’s bullish stocks
- Goods producing jobs -22k; service-providing +169k. Retail trade +53, allaying some fears that weak Xmas season could hurt #s.
- Here’s some good news: Aggregate weekly hours rose to a new post-2008 high of 104.1, which is higher than it was in 2000. [Note: chart below]
- “Not in labor force” rose again: second highest total ever. Not in labor force, want a job now also rose. This is “shadow unemployment.” [Note: charts below]
- The chatterverse will say it’s a good report, but in my view it isn’t good enough, and we’ll quickly turn to fiscal cliff again.
As noted, this isn’t a great report. It continues the theme of tepid recovery, but without the people leaving the labor force the unemployment rate would be much higher. The chart below (source: BLS via Bloomberg) shows the “not in labor force” numbers going back decades.
Now, the thing is that I’m not sure this is a temporary phenomenon – some of these people are leaving the labor force because they’re giving up, but some of them are leaving the labor force because they’re retiring, or retiring early. We would be expecting some rise in this number anyway, due to the fact that Baby Boomers are starting to retire. So I think the chart below (same source) is a better view of the part of this rise that’s truly disturbing. It shows the category “not in labor force, but want a job now.” These are people who are not counted in the labor force because they’re not looking for a job, but if someone called and offered them a job they’d take it. Presumably, when the job market starts visibly recovering, these people will start to look again.
Finally, let’s not lose sight of the fact that the economy is still stumbling, but at least it’s stumbling forward. The chart below (same source) shows the aggregate weekly hours worked by production or nonsupervisory employees (2002=100).
As I say above, this isn’t a great report, and it isn’t a bad report – in my view, it’s good enough so that the CNBC talking heads can tell everyone to buy but not so good that it will re-direct the narrative from the fiscal cliff. And it certainly isn’t good enough to claim that there’s any evidence the economy is “ready to explode” once the fiscal cliff is resolved.
Today was CPI day, which after Christmas and Thanksgiving is one of my most favorite of days. Here is what I tweeted earlier today (and there’s lots more commentary below):
- unrounded core CPI at +0.18%, a bit higher than what dropped off. Not exactly alarming, but higher than Street expectations.
- y/y core to almost exactly +2.000%. Apparel rose again after the recent rise had slowed in the last couple of months.
- Subindices: ACCEL: Housing, Apparel, Transp, Food/Bev (75.2% of basket). DECEL: Med Care (6.9% of basket). UNCH: Recreation, Comm/Ed, Other
- OER was unch…rise in Housing came from primary rents (that is, you actually pay rent) and lodging away from home.
- Core goods inflation stayed stable at +0.7% y/y; core services stable at +2.5%. I think the former number is going to rise.
This was actually something less than the most exciting CPI report in history. It was better than the Street expected, and although the year/year figure barely nudged higher the components of the number were strong. The rise came from Housing, which ought to continue to accelerate for a while given rental tightness and other forward-looking indicators, and Apparel resumed its rise as well. See the chart below (source: Bloomberg) for the update to what is rapidly becoming one of my favorite inflation-related charts.
The Cleveland Fed’s Median CPI dropped just enough to round down to +2.2% on a y/y basis, and the Atlanta Fed’s “Sticky” CPI is also at 2.2%. These measures are other ways to look at the central tendency of the inflation figures, and suggest that the current 2.0% from the traditional Core CPI is likely to converge higher rather than vice-versa.
But today didn’t change any inflation paradigms.
There was other news, however, that struck me as inflation-related and worth commenting on.
One was a story in the UK Daily Mail citing the case of a Denny’s franchisee (he owns a few dozen Denny’s restaurants) who is planning to add a 5% “Obamacare surcharge” to customer dining checks.
Now, the sum of all of the sales of this man’s Denny’s restaurants is a tiny part of the CPI category “Food away from home,” which is itself a small part of CPI, so it won’t have any impact on the numbers. Even if lots of restaurants followed suit, it wouldn’t have much of an impact since “Food away from home” is only 5.6% of the consumption basket (so a 5% surcharge on all checks would cause a rise in CPI of 0.28%), but it serves as a good reminder of one important point.
The higher taxes and other costs of doing business that are going to be targeted at business is going to show itself to individuals one way or the other. The higher cost of Obamacare compliance, and any other increased business taxes, will not be paid by businesses for the simple reason that businesses are pass-through entities. That is, businesses don’t make money; people who own businesses (partners or shareholders) make money. So whether the higher costs show up as higher prices to the consumer (in which case the government’s attempt to raise revenue from business will result in higher inflation prints, as the transition takes place) or as lower profits to the businesses themselves, the cost will end up being borne by real humans.
At the end of the day, how much of these costs is absorbed by the owners and how much is paid by the consumers is determined by the elasticity of supply and demand for the product. For example, if the elasticity of demand is infinite, then the owners will bear the entire cost; if the elasticity is zero, then consumers will pay it all. My personal guess is that given the current level of gross margins, more of these taxes and higher costs will be paid by owners – implying lower equity earnings – than by consumers, but we will see. But notice that either way, you get lower real earnings. Either nominal earnings fall, or prices rise. Not good for stocks in either case; bad for bonds in the latter case, too.
Then there are the actions of several central banks in the other hemisphere. A story in the Wall Street Journal, and echoed elsewhere such as in this Australian news outlet, suggests that the Reserve Bank of Australia has adopted a form of QE by allowing its foreign currency reserves to rise in order to push down the currency. The RBA has been one of the bastions, at least relatively, of ‘hard money’ in a world of central banks that have gone wild, so this isn’t a positive development unless you’re long inflation-related assets.
And also hard to miss were the comments by the leader of Japan’s main opposition party, Shinzo Abe, who may become the next prime minister quite soon. Abe suggested that the Bank of Japan should target 3% inflation, rather than 1% inflation, and threatened to revise the law that (supposedly) insulates the BOJ from politics. Note that 5-year Japanese inflation swaps are near all-time highs, but still only at 0.77%, and 10-year inflation swaps are at only 0.48%. Under Abe’s pressure, we would likely see a substantial acceleration in QE by the BOJ, which has already succeeded in pushing core inflation in Japan from -1.6% to -0.6% over the last two years (see chart, source Bloomberg).
We are increasingly moving into a one-way street for central bank policy. Central bankers are essentially engaging in a sophisticated version of competitive devaluations. The Fed does QE, the BOE does QE, the ECB does QE (but claims it doesn’t), the SNB and BOJ and now the RBA does QE. It is a one-way street because whoever stops printing first will see his currency shoot higher as investors flock to the harder currency. The chart below shows what has happened to the Aussie dollar over the last decade versus the USD. While the strengthening trend was interrupted by the 2008 flight-to-quality, it quickly resumed. Since that time, it has risen roughly 50% (and 100% overall since 2001).
Now, a strong currency is good. It makes foreign goods cheaper and raises the standard of living overall. However, it also hurts exports, which slows the economy and results in visible layoffs while the economy adjusts. There’s only so much of this a country’s politicians are willing to take, and it seems Australia may have reached its limit.
If everyone is printing, exchange rates may not move at all. It has frustrated many dollar bears that the greenback hasn’t declined under the profligate printer Bernanke; printing money is supposed to destroy a currency. It has done so repeatedly over the course of history, and it happens for obvious reasons: when you get a bumper crop of something, its price tends to fall. More supply induces lower prices. In this case, it induces a lower price of a currency unit in terms of other currency units.
But that only happens if the relative supply of a currency is changing. If everyone is printing at roughly the same pace, there is no reason that currencies should move at all relative to each other. They should all fall relative to non-printers, or to hard assets. And that’s why it’s even more incredible that commodities are not shooting higher. Yet.
Those effects, in my view, absolutely swamp in importance the weak growth news we’re getting these days. Today, the Philly Fed report and Initial Claims were both quite weak, but the data is going to be polluted by hurricane Sandy for a while and hard to interpret. I don’t think the hurricane had anything to do with this story, or its timing for that matter:
“Nov. 15 (Bloomberg) — The Federal Housing Administration will need billions of dollars in aid from the U.S. Treasury before the end of the year to fill a financial hole caused by defaults on mortgages it insures, House Financial Services Committee Chairman Spencer Bachus said today.
“… The agency is “burning through” its last $600 million and FHA officials have briefed him that they will need a financial backstop within a month, the Alabama Republican said during a press conference in Washington.”
So, we are trying to figure out how to raise a trillion dollars over ten years to start closing the budget gap, but it helps to remember that there are other groups who are going to be bellying up to the bar for a hit of government help. The FHA, the postal service (-$15.9bln this year, although they expect to lose only $7bln next year), probably California before long. We’d better get our act together quickly…but as yet, there is no sign of it. Nice of Bachus to wait until less than a month before the FHA runs out of money to mention this, by the way.
And I haven’t even mentioned the sudden explosion of violence in Israel, which doesn’t give the impression of a fire that will quickly burn out. It may not spin out of control, either, but it bears watching very closely since our influence in the region has significantly ebbed since the change of control in Egypt, our exit from Iraq, and our distancing from Israel.
I don’t think 2013 is shaping up to be a very fun year. But we’re not there yet!
This is a summary of my Post-CPI tweets today. You can follow me @inflation_guy.
- Core CPI +0.146%, just barely missing the soft +0.2% people were looking for. But y/y still rose to 2.0%.
- that dip in core is over – next several months have easy year-ago comps.
- Services inflation +0.3%, as is Housing. It’s only core commodities that’s a drag now (+0.0% after -0.1% last month).
- Rents (both primary and OER) rose +0.2% and the y/y rise matches core inflation at 2.1%. The inflation-sapping bust is over.
- unrounded y/y core CPI: 1.988%.
- Y/Y core services inflation is 2.5%. Y/Y core goods is +0.7%. It was services that dragged core down in 2009-10. That’s over. [Note: see Chart, source BLS, below]
- accelerating subgroups: Housing, Apparel, Transport, Recreation (66.2%). Decelerating: Food&Bev, Other (20.2%). Med Care & Educ/Comm unch.
- Both primary rents (+2.7% y/y) and OER (+2.1% y/y) are accelerating – by which I mean they are inflating at a faster y/y pace.
- Median CPI from the Cleveland Fed was +0.2%, and the y/y rate steady at 2.3%. The recent disinflation is an illusion.
The first supplementary chart is for core goods and core services. The sum of these two (weighted, of course) is core CPI. As you can see, it was the decline in the core services component (notably housing) that drove the decline in core CPI in the late ‘Aughts; the overall core number was temporarily kept afloat by the rise in core goods, but the crisis caused that to collapse as well.
Over the last couple of years, core services have returned to 2.5%, and core inflation is only as low as 2% now because core goods prices have begun to decline again. However, taking a broader view, it appears to me that the disinflation in goods from the early 90s to the early 00s is over and that goods prices are gradually taking a higher track. I’ve written previously about the possibility that the “globalization dividend” in terms of disinflationary pressures has shown some signs of ebbing. Obviously, should core goods inflation return to the levels it achieved a year ago (2.2% in November and December), overall core inflation would be comfortably above 2% even if core services inflation did not continue to accelerate.
In a non-CPI related note, New York Fed President Bill Dudley said today that the Fed won’t be “hasty” to pull back easy money: “If we were to see some good news on growth I would not expect us to respond in a hasty manner.” This confirms what we already knew – the Fed is willing to risk letting the inflation genie out of the bottle. Now, faster growth is not actually causal of inflation, as I frequently point out, so not responding to growth is ironically the right strategy, but it’s important to consider the reasons he gives for this policy. He is not saying that the Fed will not respond to growth because growth is not something they can affect; what he’s actually saying is that (since the Fed believes they can affect growth meaningfully) there is a very high hurdle to tightening even if prices accelerate somewhat further as long as growth remains slow.
So in what I think is the most likely case, continued slow growth with rising inflation, the Fed wouldn’t likely start to tighten the screws until core inflation was near 3% (and more importantly, until the economists who are modeling inflation as a function of growth decide they’re wrong, and stop forecasting a decline from whatever level we are at today). Since there is a significant delay of at least 6 months from Fed action to any effect on prices, this means that core inflation could easily get comfortably above 3% before any Fed action took effect – and, with the amount of money they’d need to withdraw, and the likelihood that they would start timidly, I have no idea how long it would take for them to stop an inflationary process which, at that point, would have considerable momentum.
So, in summary, this will not be the last uptick we see in core inflation.