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Summary of My Post-CPI Tweets

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 with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • Pretty big market day! Importantly, CPI: remember last month was big upside surprise, and driven by unusual suspects – core goods.
  • There’s a decent base effect hurdle today, as last Feb was 0.25% on core CPI. Consensus today is for a very weak 0.2% (almost 0.1%).
  • The consensus forecast clearly says that most economists see last month’s shocking 0.31% on core as one-offs.
  • Consensus expectation is for core to slip back to 2.2% from 2.3%. But then, last month they thought we’d fall to 2.1%.
  • Hurdles get easier next month: March ’16 saw 0.09% core CPI, and then a series of low 0.2s & 0.1s. So core is going up this summer.
  • Here is what I said about last month’s figures: https://mikeashton.wordpress.com/2017/02/15/summary-of-my-post-cpi-tweets-36/
  • 5 mins to CPI. Sources say the headline number is trading 243.34 (which would be -0.04% on headline) in the CPI derivs mkt.
  • core at 0.21%, higher than consensus expectations of 0.15% or so. Keeps y/y at 2.22%, down from 2.26%. But next month is an easy comp.
  • Monthly core CPI prints.

  • I don’t pay much attention to headline but it was a little high, y/y up to 2.74%. Only matters if it affects tenor of Fed discussion.
  • In major subgroups: Housing rose to 3.18% vs 3.12%. Need to see if that’s energy. Apparel fell back, as did health care.
  • w/in housing, Primary Rents slipped to 3.91% from 3.93%, Owner’s Equiv to 3.53% from 3.54%. So the housing bump was elsewhere.
  • Looks like the housing increase was mostly household energy, 4.46% from 3.51%. So no biggie as the kids say.
  • Apparel 0.42% vs 0.99%. The big jump last month was mostly reversed. Overall core services 3.1% and core goods dropped back to -0.5%
  • Last month the big story was that core goods had caused the jump in core CPI. Looks like these were mostly seasonal issues after all.
  • Transportation 6.3% vs 4.8%. That’s mostly gasoline. New & used cars slipped. But rising: parts, maintenance, insurance, airfares.
  • In Medical Care, big drop in medicinal drugs 4.19% vs 4.85%. Also drop in prof svcs (2.68% v 2.94%). THOSE are the one-offs this month.
  • Here are y/y med care & housing, source of the big upward pressure recently. But remember this month the housing is mostly energy.

  • Four more major subcategories. Recreation is the only one moving higher, but it’s a heterogeneous group & hard to decipher.

  • Quick estimate of Median is 0.21% m/m, 2.52% y/y, not quite a new high. Official figure will be out later.
  • Next month we should have core back over 2.3% and a shot at 2.4%, thanks to easy comp in March.
  • 10y inflation swaps still below current median inflation.

  • Mkt pretty confident in Fed: CPI mkt pricing: 2017 2.0%;2018 2.2%;then 2.2%, 2.1%, 2.2%, 2.2%, 2.3%, 2.4%, 2.5%, 2.7%, & 2027:2.5%.
  • This CPI report takes inflation off the boil, but not off the burner.
  • One more chart: weight of CPI categories over 3% inflation y/y.

Let’s face it. While this month’s CPI held some intrigue because of last month’s surprising spike, nothing about the figure was likely to change the outcome of today’s FOMC meeting and probably not the tenor of the statement or post-meeting presser. So, in that sense, this was a much less-significant report than last month’s release.

At the same time…let’s not lose sight of the fact that this was still an above-consensus CPI report. While the consensus was broadly correct that some of the jumps in core goods categories from last month were one-offs, and at least partially retraced this month, it’s still the case that y/y core inflation is going to keep rising through the summer merely on base effects. If the Fed wants to be hawkish and tighten more than the market currently expects (I think that nothing could be further from the truth, with Yellen at the helm, but she seems to dislike President Trump enough that she might forget some of her dovish leanings), then they will continue to have cover from inflation reports for a while.

Going forward from that, there are two inflation questions that will be resolved: (1) Will core goods recover and rise, indicating a broadening of inflation impulses that could produce a longer-tail upside? And (2) will housing inflation flatten out or decline since rent inflation is currently rising faster than even our most-generous models? If it does, then core inflation might stabilize near the current level, or even decline.

I have trouble figuring out what the mechanism would be for inflation to flatten out at these levels, from the macro-monetary perspective. Money growth remains brisk and higher interest rates should eventually goose velocity. I don’t see much prospect of money growth rolling over while banks are neither capital- nor reserve- constrained. And it’s hard to see interest rates heading back down while central banks shift into less-accommodative stances. I have more confidence in the macro-monetary (“top down”) model at longer time frames, and more confidence in the bottom-up analysis at shorter time frames. And for years they’ve told the same story: inflation should be rising, and it has. But there is a conflict between these perspectives that is coming later this year. How it resolves will be the story of the next 3-6 months.

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