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Summary of My Post-CPI Tweets (August 2017)

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. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • about 15 mins to CPI. Consensus on core is 0.15% or 0.16% m/m, which would see y/y rise to ~1.74% vs 1.71%.
  • Few see upside risks to that forecast. Indeed, most pundits are braced for a lower print. 0.15% on core would have beaten last 4 mo.
  • Last 4 core CPI: -0.12%, 0.07%, 0.06%, 0.12%. But the 4 before that were 0.18%, 0.22%, 0.31%, and 0.21% so it’s a fair bet.
  • Though the NKor situation dominates market concerns, today’s CPI garnering more than normal interest. Potential for some volatility.
  • We’ve heard dovish Fed govs floating idea of pausing rate hikes (though continuing balance sheet reduction). That’s what doves do, but…
  • …but another weak CPI will be seen as “sealing the deal” for removing rate hikes from the calendar.
  • STRONG core CPI print is a much bigger surprise to most. Might be less mkt risk though – want to sell Tsys with NKor situation hot?
  • Core CPI 0.11%, y/y: 1.70%. Actually slightly down v 1.71% last mo. Think we can take rate hikes off table but will look @ breakdn.
  • Core goods steady at -0.6%, no dollar effect pushing it higher yet. Core services 2.4%, lowest in 2yrs.
  • Just quick glance I see new cars -1.1% y/y down from -0.3%. If this is autos I’d not be as worried.
  • Core ex-Shelter rose slightly, actually, to 0.63% from 0.60% y/y. But that’s obviously not alarming.
  • Dropping the full data set at the moment. Please hold.
  • In Housing, Primary Rents decelerated to 3.81% from 3.86%. OER slipped to 3.21% vs 3.23%. Small moved but big categories.
  • Lodging Away from Home -2.36% vs -0.07%. Big move, small category. But that category often has big moves.
  • Apparel went to -0.44% vs -0.67%. Again, not really seeing the dollar effect – apparel is one of the first places it would show up.
  • New cars -0.63% vs 0.01%, weight of 3.68% of CPI. Not only the lowest in 8 years but…recession leader? See chart.

  • Used cars -4.08% vs -4.30%, so the effect is in new.
  • That new cars decel is worth 3bps on core, so if was still at 0.01% we’d have had core right at expectations even w/ shelter slowdn.
  • Medical Care 2.58% vs 2.66% y/y. Pharma rose (3.84% vs 3.31%) but Prof Svcs dropped to 0.21% vs 0.58%
  • Medical – Professional Services starting to look like Telecommunications. What’s the one-off here?

  • Again with rents…decelerating but right about back on schedule.

  • For those playing at home: wireless telephone services -13.25% vs -13.19%. After the huge drop a few months ago, not much add’l.
  • Incidentally, Land Line Phone Services is 0.73% weight in CPI while Wireless is 1.74%. Gone is the ubiquitous creamcicle on the wall.
  • A little hard to guess at Median b/c median category looks like Midwest Urban OER, which gets a 2nd seasonal adj, but my est is 0.18%.
  • Here’s the inflation story over the last year, in two important chunks.

  • US #Inflation mkt pricing: 2017 1.3%;2018 1.8%;then 2.1%, 2.1%, 2.1%, 2.2%, 2.1%, 2.1%, 2.3%, 2.4%, & 2027:2.4%.
  • Here’s a little teaser from our quarterly. These are not forecasts, but entirely derived from mkt data.

  • Inflation in four pieces: Food & Energy

  • Piece 2: Core Goods, nothing to see here.

  • Core Services Less RoS – this is the core CPI story.

  • …though don’t forget piece 4. As noted earlier, this is just going back to model but some will forecast collapse.

  • This might be the bigger story – declining core CPI is all about the weight in the left tail, which is why median is still at 2.2%.

  • Despite core CPI slowdown, 44% of components are still inflating faster than 3%.

  • …this makes it more likely the recent CPI slowdown reverses, b/c it’s being caused by left-tail outcomes that probly mean-revert.

Coming into today the market thought the probability of a December rate hike was only 38%, which seemed very low to me. But there is nothing here that suggests the doves are going to lose the fight to slow down the already-timid pace of rate hikes. It isn’t surprising to see markets rally on this data.

However, it is also easy to get carried away with the story that inflation is decelerating. Those left-tail categories are what is driving core inflation lower (and it’s the reason I focus on median CPI, because it ignores the outliers). Shelter has come off the boil a bit, and if that rolled over I would be more concerned about seeing much lower CPI. But there is no sign of that happening, and it seems unlikely to given that home prices themselves continue to rise at a better-than-5% clip (see chart, source Bloomberg).

So, if shelter isn’t going to continue to decelerate much more, then the risk going forward is mean-reversion of those left-tail categories. I don’t think Physician Services are going to go into deflation. (To be sure, some of that is probably a measurement issue as the mode of hiring and paying for doctors is changing, and it is hard to predict mean reversion from measurement issues). Thus, if the market starts to price a near-zero chance of higher rates come December, I’d be interested in buying that option on the chance that one or two of these next four CPI prints (the December CPI report is out the day of the December FOMC meeting) is tilted the other way.

Inflation Markets Showing a Pulse

We are two days away from the next electrifying CPI report (well, some of us consider it electrifying). The last few prints have been very low, causing great consternation among investors, economists, and other analysts who like to try and “play the carom” by picking turning points in the data.

As I have written before, there is nothing yet to suggest that inflation has abruptly turned and started to dive, and most of the shortfalls over the last few months have been caused by one-offs. (You can review my May, June, and July CPI summaries for the details, and also look at one of those one-offs in depth here.) Indeed, it would be odd if inflation suddenly turned tail and ran, since global money growth remains adequate to support the current level of inflation (see chart, source Enduring Investments).

This chart only shows the US and Europe, but if you add the UK and Japan and Switzerland and whatever else you like, the picture doesn’t change appreciably. In addition to the steady money growth (which, it should be remembered, no central bank is trying to restrain since most of them don’t believe it matters), housing prices continue to rise faster than inflation (see chart, source Enduring Investments) – which suggests that the cost of shelter is not about to suddenly go into retreat.

Finally, although it’s a minor effect, the dollar has recently weakened meaningfully. It isn’t a big deal but it changes the sign of that minor effect. Yes, there are pockets where I expect to see some coming or continuing weakness in pricing, such as in autos, but overall it would surprise me to see this three-month trend actually represent the top tick. Not to mention that such a thing would imply the casual inflation pundits were actually right, and not only right but timely. What are the odds?

Meanwhile, there are some interesting undercurrents that suggest I am not alone in thinking that inflation isn’t dead (again, or still, depending on your point of view). Against form, inflation swaps in the US have been rising anew; even more surprising, European inflation swaps are reaching towards new highs (see chart, sourced from our daily chart package) even though the Euro has been strong.

The market isn’t always…or even often…right. But there are flows into inflation product right now that, while hardly tsunamic, are causing moves unlike any we’ve seen recently. Also note that commodities are showing strength – the Bloomberg Commodity Index is up 6.5% since late June, and that isn’t all energy. The chart below (source: Bloomberg) shows the Bloomberg Commodity Index ex-energy.

With CPI on Friday, all I am saying now is that this is worth keeping in mind. Among all of the other negatives for stock and bond markets recently, a renewed rise in inflation would be an unwelcome addition.

Categories: CPI

Summary of My Post-CPI Tweets (July 2017)

July 14, 2017 2 comments

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. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • quick CPI review: last 3 months have been -0.12%, +0.07%, and +0.06% on core CPI – that is, basically flat.
  • three months before that were 0.22%, 0.31%, and 0.21%. Basically a 3% annualized rate. Which of these is “right”?
  • Market has become convinced something around the current 1.75% average is “right.” But we’ve had big misses both sides.
  • Consensus for today is for 0.2% on core, 1.7% y/y, but that’s a very narrow range. Basically 0.15% m/m gets both of those.
  • If we get 0.16%, then y/y should round up to 1.8% y/y. If we get 0.14%, then m/m rounds down to 0.1%.
  • Of course, recent months have shown us something wildly different is possible!
  • core CPI 0.119%, again below consensus…y/y drops to 1.71%.
  • This is closer to the summer lull we’ve seen recently. But still low. Here are the last 12 months of core CPI.

  • That chart is weird, looks like there was a dramatic effect in March that’s wearing off. But it’s actually been a series of one-offs.
  • Core services at 2.5% y/y, down from 2.6% (and down from 3.1% as recently as Feb). Core goods -0.6%, up from -0.8%.
  • Core CPI ex-shelter was basically unchanged at 0.6% y/y, matching 13-year lows.

  • Owners Equiv Rent was +3.23% y/y, Primary Rents 3.86% vs 3.85%. So the low print isn’t main part of housing.
  • But housing overall – the major subgroup – decelerated to 3.02% from 3.12%. So that deceleration is elsewhere.
  • Medical Care CPI was unchanged at 2.66% y/y.
  • Pharma inflation 3.31% from 3.34%. Professional Services 0.58% from 1.0%. But hospital services 5.65% from 4.95%.
  • This chart is physician’s services. I’m really curious about this.

  • An optimist could say ‘this is b/c high deductibles under Ocare force consumers to negotiate aggressively with doctors.”
  • Pessimist: “even if that’s true, it means fewer doctors tomorrow, ergo higher prices.” & where is this effect in hospital prices?
  • I don’t see anything very quirky in these numbers unlike past months. OER still converging with our model.

  • If there’s “nothing unusual,” it suggests underlying core rate is something near 1.5%. But inflation always on the way to somewhere.
  • Four-pieces breakdown: Food & Energy

  • Four-pieces breakdown: Core Goods. Still bumping along, but this will turn higher as USD weakens.

  • Four-pieces breakdown: Core Svcs less Rent of Shelter. This continues to be The Story.

  • Four-pieces breakdown: Rent of Shelter – as I said, ebbing but just because it was ahead of itself. Housing isn’t about to deflate.

  • As @pearkes points out, core services ex-housing largely a medical story, and that’s likely temporary. Chart for CPI medical care:

  • I find it ironic: if Ocare IS helping to contain health care, it’s b/c consumers negotiate harder when they don’t really have health care.
  • …which would seem to run counter to the professed reason for the ACA, which was to increase coverage. Is it working b/c it’s not working?
  • Enough CPI for today. Don’t forget to buy my book!
  • Also, good friend just published a thriller: http://amzn.to/2um7vIi He’s a very engaging author if you like fiction.

It was just a few months ago that we worried about whether core inflation was about to accelerate past 3%. Then, we had a few months where some people (not me!) worried that we were suddenly plunging into deflation and core inflation was around 0%. The reality seems to be somewhere in the middle. The recent ultra-low prints are clearly the results of one-offs, but it also seems as if the ongoing upward pressures – for example, in housing – have come off the boil as well. Back when rents were surging, I was worried that our model was perhaps not capturing some other dynamic and that rents would run away to the upside; in the event, it was probably just noise.

So what is the true underlying dynamic? We have to remember that economic statistics are just experiments – samples of an unknowable distribution. And, since economic data is very noisy, it usually takes a lot of data to be able to say for sure that something has changed. Economists and other prognosticators are usually not so patient. We got a weak number, and we want to say right now that something fundamental has changed. It doesn’t work that way.

Inflation data are usually fairly stable (once you strip out food and energy), so a couple of surprising figures is often enough to signal a changing dynamic. But one curious aspect of the last year’s worth of core inflation data is that it has been very volatile – in fact close to being the most volatile in the last twenty years:

There are a couple of implications to that observation, but the key one here is that it means it’s harder to reject any particular null hypothesis when the data are all over the place.

So here’s the summary: the main contributor to lower core inflation that is difficult to shrug off completely is the abrupt plunge in medical care inflation. This also happens to be the category that is most difficult to measure, since most consumers do not directly pay for much of their health care…or, anyway, they didn’t until Obamacare led to dramatic increases in deductibles. But that change in who pays for health care makes it very difficult to disentangle what the price of health care is actually doing, as opposed to the quantity of health care consumed. Very, very difficult.

My suspicion, based on direct observation and conversations with professionals in hospital and practice management, is that there are indeed pressures to contain healthcare costs, part of which are being caused by the fact consumers are having to negotiate directly with doctors for care and part of which are the result of other institutional pressures, such as the effect of Medicare/Obamacare legislation on formulary negotiations. Does that mean Obamacare is “succeeding?” If the sole purpose of the ACA was to lower health care costs by reducing the consumption of health care – maybe it is, at least in the short run. Certainly, there is a lot of energy on the entrepreneurial side dedicated to finding ways to cut costs, and lots of inefficiencies that can be wrung out…and, if “angry consumers” is the impetus for organizations finally wringing out these inefficiencies, I suppose that’s not a bad thing.

As I said earlier, I think it’s too early and there’s too much noise to say that something fundamental has changed. Heck, a year ago I thought medical inflation was about to run away on the upside (and I wasn’t alone, as the Republican sweep of Congress attests). I am not about to be fooled in the opposite direction as easily. What I will say is that I have trouble believing that inflation in the cost of physicians’ services is going to go negative, or stay near zero for a long time. I could be wrong, but I suspect that part of the pendulum will start to swing back over the next six months.

Categories: ACA, CPI, Tweet Summary

Housing Disinflation Isn’t Happening Yet

June 19, 2017 8 comments

Before everyone gets too animated about the decline in core inflation, with calls for central banks to put the brakes on rate normalization, let’s realize that the main drivers of lower inflation over the last few months – zero rise in core CPI over three months! – are not sustainable. I’ve written previously about the telecommunications-inflation glitch that is a one-off effect. Wireless telephone services fell -1.38% month-over-month in February (not seasonally adjusted), -6.94% in March, and -1.73% in April. In May, the decline was -0.06%. Here is a chart, courtesy of Bloomberg, showing the year-to-date percentage declines for the last decade. The three lines at top show the high, average, and low change over the prior decade, so you can see the general deflationary trend in wireless telecom services and the historical outliers in both directions. The orange line is the year-to-date percentage change. Again, the point here is that we cannot expect this component of inflation to deliver a similar drag in the future.

The other main drag comes from a less-dramatic decline in a much-larger component: Owners’ Equivalent Rent. In this month’s CPI tweetstorm, I pointed out that this decline is mostly just returning the OER trend to something closer to our model (see chart below), but many observers (who don’t have such a model) have seen this as a precursor to a more-significant decline in rents.

This is actually a much more-important question than the dramatic, and easy-to-diagnose, issue of wireless telecommunications, because OER is a ponderous category. You can’t get high inflation without OER rising, and you can’t get deflation or even significant disinflation without OER declining. It’s just too big. So what are the prospects for OER rolling over?

Here are two reasons that I think it’s very unlikely that this is a precursor to a significant decline in housing inflation.

First, while I understand that rent increases in some parts of the country are moderating, they are always moderating somewhere in the country. Owners’ Equivalent Rent tends to parallel primary rents (“Rent of Primary Residence,” which measures the actual price of a rental unit as opposed to implied rent of an owner-occupied dwelling) reasonably well, and when home prices are rising it tends to imply that rents – as the price of a substitute, at least for the consumption part of home prices – are also rising. (A house is both an investment asset and a consumption good, and the BLS’s method for separating these two components of a home recognizes that the consumption component should look a lot like the substitute). And the fact is that Primary Rents are not (yet?) decelerating much (see chart, source Bloomberg).

Yes, I understand and agree that home prices are already too high to be sustainable in the long run. Either incomes need to outpace home prices for a while, or home prices need to decline again, or we need to become accustomed to housing becoming a permanently larger part of our consumption and asset mix (see chart, source Enduring Investments).

But is that going to happen? Well, here are two charts that should make you somewhat skeptical that at least on the supply side we are about to see a decline in home prices. First, here is the index of Housing Starts, which last month took a nasty drop. Even without the nasty drop, though, notice that the level of starts was not only far below the level of the last few peaks in the housing market, but actually not far above the troughs reached in the recessions of the mid-1970s, early 1980s, and early 1990s. The only reason the current level of starts looks high is because homebuilders basically stopped building for a few years after the housing bubble.

Homebuilders stopped building because there was suddenly plenty of inventory on the market! In the immediate aftermath of the bubble, the homes that were available for sale were often distressed sellers and as prices rose, more and more of the so-called “shadow inventory” (people who wanted to sell, but were now underwater and couldn’t sell) was freed. This kept a lid on overall housing starts, but the net effect is that even now, when most of that shadow inventory has presumably been liquidated (a decade after the bubble and at new price highs), the inventory of existing homes available for sale has become and has remained quite low (see chart, source Bloomberg).

The supply side, then, doesn’t seem to offer much cause to expect home prices to moderate, even if their prices are relatively high. I’d want to see an overreaction of builders, adding to supply, before I’d worry too much about another bust, and we haven’t seen that yet. So we have to turn to the demand side if we expect home prices to decline. On that side of the coin, there are two arguments I sometimes hear: 1) household formation in the era of the Millennial is low, or 2) households don’t buy as much housing as they used to.

There is no evidence that household formation has slowed in recent years. As the chart below (source Bloomberg) shows, household formation has been rising since 2009 or so, and is back in line with long-term trends. Millennials may have weird notions of home life (I don’t judge!), but they still form households of their own.

As for the second point there…notice that I phrased the question as whether Millennials are buying less housing, rather than as buying fewer homes. I think it’s plausible to suggest that Millennials might demand fewer homes to buy, but it’s hard to imagine that they’re neither going to rent nor buy homes – and if they do either, they are demanding shelter as a consumption item. It just becomes a question of whether they’re demanding rental housing or owned housing.

The upshot of this is that there’s no sign yet of a true ebbing in housing/rental inflation. And until there is, there’s scant need to fear a disinflationary trend taking hold.

Summary of My Post-CPI Tweets (June 2017)

June 14, 2017 3 comments

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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. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • CPI day! People looking past CPI at 8:30 but…not me!
  • Last 2 CPI prints were very low. The first was a 1-off wireless telecom debacle, read about that effect here.
  • Last month’s CPI weakness was in core services – in medical care & rent of shelter. Harder to ignore but unlikely to be in freefall.
  • Consensus core CPI is for another weak print, only 0.16% or so. Economists believe disinflation is upon us. I think that’s premature.
  • Last May’s core CPI was 0.21%, so that’s the hurdle to get acceleration in y/y figures.
  • WOW! At this rate I will have to change my Twitter handle. Each month is more shocking. m/m core 0.1%, not sure on the rounding yet.
  • 06% m/m on core CPI, so again incredibly weak. y/y at 1.74%, producing the scary optic of a drop from 1.9% to 1.7% on the rounded core
  • This is an amazing chart.

  • waiting for the data dump, but housing, medical care, apparel subcomponents all decelerated.
  • So the upshot is…core prices overall are unchanged from February. That’s right, 0% core inflation over 3 months.
  • Yes, it was telecom that made 0% possible and that won’t be repeated. But still striking. Here is the index itself.

  • So Dec, Jan, Feb core inflation is rising at a 3% annualized pace. next 3 months, zero. That’s not supposed to happen to core.
  • Breakdown now. In Housing, Primary rents remain solid at 3.85% y/y, unch. But Owners’ Equiv plunged (for it) to 3.25% from 3.39%.
  • Picture of OER: this is a dramatic shift in this index, and frankly hard to explain given home price increases.

  • Medical Care decelerated to 2.66% from 2.95%. But w/in MC, drugs rose to 3.34% vs 2.62%. Professional svcs flopped to 1.00% from 1.58%
  • CPI/Med Care/Professional Services, y/y. Doctors suddenly don’t need to be paid.

  • Apparel had been at 0.45% y/y, fell to -0.94%.
  • The Fed funds rate is too low and almost certainly rises today. But with a sudden zig in CPI…it wouldn’t SHOCK me if they delayed.
  • Back to housing – we’ve believed OER was ahead of itself for awhile. Adjustment is just really sudden.

  • in the biggest-pieces breakdown, core goods is at -0.8% y/y while core services is down to 2.6%.
  • US$’s recent decline (2y change in trade-weighted $ is only +7%) means core goods are losing the downward pressure of last few yrs.
  • But the dollar’s effect is lagged significantly. We’re still seeing effect of prior strength.

  • Here are the four pieces of CPI, most volatile to least. Starting with Food & Energy (21% of CPI)

  • Core goods (33%)

  • Core services less Rent of Shelter. Yipe!

  • Got my percentages wrong. Food & Energy is 21%. Core goods is 19%, core services less ROS is 27%. Rent of Shelter is 33%.
  • Rent of Shelter. 27% of overall CPI. I still find it hard to believe this is going to collapse, but as I tweeted earlier it was ahead.

  • My early estimate of Median CPI is 0.18% m/m, 2.28% y/y down from 2.37%.
  • One thing to keep in mind is that in June and July we drop off 0.15% and 0.13% from y/y core. So core should bounce back some. (??)
  • I mean, we can’t average 0% core going forward, right?!? Otherwise @TheStalwart and @adsteel will never have me on again.
  • core ex-shelter down to 0.59% y/y. Lowest since JANUARY 2004!

  • Interestingly, the weight of categories inflating more than 3% remains high. The pullback is in the far left tail.

Well, it’s getting harder to put lipstick on this pig. The telecom-induced drop of a couple of months ago was clearly a one-off. But the slowdown in owners’-equivalent rents is merely putting it back in line with our model, and so it’s hard to believe that’s going to be reversed. And I’m really, really skeptical that there has been an abrupt collapse in the rate of increase of doctors’ wages.

Except, what if there is a shift happening from higher-priced doctors to lower-priced doctors? This sort of compositional shift happens all the time in the data and it’s devilishly hard to tease out – for example, in the Existing Home Sales report it is sometimes difficult to tell if a change in home prices is coming from a broad change in home prices, or because more high-priced or low-priced homes are being sold this month, skewing the average. So this kind of composition shift is possible, in which case each individual doctor could see his wages increasing while the average declines due to the composition effect. I have no idea if this is what is happening – I’m just making the point that if it is, then this effect could be more persistent and not the one-off that the telecom change was. However, I am skeptical.

I do not believe that we have seen a turn in the inflation cycle. With money growth persistently above 6%, it would take a further collapse in money velocity from already-record-low levels to get that to happen. Forget about the micro question, about whether movements in this index or that index look like they’re rolling over. The macro question is that it is hard to get disinflation if there’s too much money sloshing around, whether or not the economy is growing.

But that being said, the Fed doesn’t necessarily believe that. There is a tendency to believe one’s own fable, and the fable the FOMC tells itself is that raising interest rates causes growth to slow and inflation to decline. Although the effect is spurious, we are currently seeing somewhat slower growth (for example, in the recent slowing of payrolls) and we are seeing lower core inflation. It is a low hurdle for the Fed to believe that their policy moves are an important part of the cause of these effects. Of course, they’re not – the tiny changes the FOMC has made in the overnight rate, even if it had been propagated to significant changes in longer rates – which it hasn’t been – or resulted in slower month growth – it hasn’t, especially if you look globally – would not have had much effect at all. But that won’t stop them from thinking so. Ergo, the chance that the Fed skips today’s meeting, while small, are non-zero. And there is a much greater chance that the “dot plot” shifts lower as dovish members of the Fed (and that’s most of them) back away from the feeble pace of increases they’d been anticipating.

Summary of My Post-CPI Tweets (May 2017)

May 12, 2017 6 comments

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. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

This month, I am making sure to include my comments before the actual number, since my suspicions about the upside risk were exquisitely wrong. This is why you shouldn’t put a lot of weight on monthly figures, folks!

  • Step right up ladies and gents. The CPI circus is about to commence.
  • Last month’s circus crazier than usual, including an unprecedented (and inexplicable) 11+% drop in wireless telecom services. [Editor’s note: it was only 7%. I corrected this in a later tweet]
  • This caused more diversion in core and median CPI. Median (better measure) remains steady at 2.5%.

  • PPI y’day was broadly strong. I don’t pay much attention to PPI but it does create upside risk.
  • Also note that European inflation saw a drop and then big jump from the early Easter. Not sure we have an analog but…
  • Point is that consensus is for 0.17% or so. There’s a lot of upside risk to that number I think.
  • Over next few months, core will rise regardless as we drop off 0.18, 0.21, 0.15, and 0.13. Easy hurdles.
  • Wow! Core only 0.1% again! Even a low 0.1%…0.07%.
  • I cannot WAIT to get a look at the breakdown.
  • ..Medical Care ebbed from 3.5% y/y to 3.0% y/y, wanna look inside that one. Recreation and yes, communication also soft.
  • Core drops to 1.89% y/y. Lowest since late 2015. Of course, remember that median is a better measure – we’ll see that later.
  • [I retweeted this, look at Matthew’s yellow line here]

  • Wireless telecom services fell another 1.7%. Incidentally I earlier said 11% m/m was last mo…it was only 7% m/m, the 11% decline was y/y.
  • so wireless telecom services now down 12.9% y/y, 9.9% over the last 3 months. This really warrants explanation from BLS.
  • In Medical Care, Medical Drugs fell to 2.62% from 3.97% y/y. Professional svcs, which is twice the weight, fell to 1.58% from 2.50%.
  • Health insurance fell to 2.72% vs 3.34%. Lowest since 2015.
  • Medical decel seems implausible but remember is a rate of change measure. So rising from high level, but at slower rate, is lower CPI.
  • Let’s get to housing. Primary rents 3.84% vs 3.88%. OER fell to 3.39% from 3.49%, that’s a big drop for 25% of the index.
  • So overall, Housing rose from 3.1% to 3.2%, but that’s on the strength of a 1% rise in household energy y/y.
  • This is OER. The decline is actually welcome – it had been running well ahead of even our optimistic models.

  • Core goods steady at -0.6% y/y. So the deceleration in last two months is all from core services, from 3.1% to 2.9% to 2.7%.
  • I don’t see that slowdown in core services as sustainable unless housing rolls over…
  • …and I don’t see that happening while home prices keep rising at 6-7% as they have been.
  • Weakness in services outside of housing s/b taken with grain of salt though…a lot of that is wireless services!
  • But doing core-less-housing-and-wireless is cheating. We take out housing to look @ the wiggly stuff. Can’t also take out wiggly stuff.
  • OK, four-pieces CPI look. From most-wiggly to least. They tell the story. Food & Energy:

  • Core goods (about 19% of CPI)

  • Core services less rent-of-shelter (26% of CPI). <<BOOM>>

  • And Rent of Shelter (33.3%)

  • And within core services less ROS, a lot of that is wireless but medical care ebbing is also in there. That’s the story of this month.
  • On Median…I have 0.13% m/m, but the median category is an OER piece and the BLS seasonally adjusts those.
  • But my best guess on median is 0.13%, dropping y/y to 2.4%.
  • Maybe I’m wrong and inflation pressures are ebbing after all. You know who else is thinking that? Janet Yellen.
  • Forgot to tweet this chart earlier.

  • Also interesting. Core<median b/c of big weight in left tail. But also starting to be more weight in general left of mode.

  • Last routine chart: the weight of categories inflating faster than 3% is still almost half. It’s that left tail draggin’ stuff down.

It was easy to ignore last month’s negative core print. It was obviously tied to a ridiculous (and still not explained by the BLS) plummet in the price of wireless telecommunications services. A 7% fall, nationwide, in one month, that no one seems to have noticed, is something the BLS really needs to comment on (my best guess is that some data plans got uncapped, and the BLS assumed a large increase in the data taken at zero dollars and therefore a big drop in the price per gig. That’s effectively a hedonic adjustment, and a not unreasonable one if you really saw a dramatic increase in data being taken. Since I have yet to talk to anyone who saw anything that resembled this huge effect, I remain skeptical.) But in any event, it was easy to ignore March’s number released in April.

Now we have two months in a row, and while wireless telecom contributed this month as well, there was also softness in medical care and in owner’s equivalent rent. That’s harder to ignore. And while median CPI was steady after last month’s debacle, it should downtick today.

I don’t think inflation is done rising; I think this is just a pause. But as I said above, I am sure that the decline in core CPI and core PCE will not go unremarked at the next FOMC meeting – the one where they are supposed to hike rates again. I think we’ll learn a lot about the stomach the Fed has for continuing the rate normalization regime by whether they go through with the next hike.

Categories: CPI, Tweet Summary

Tariffs are Good for Inflation

The news of the day today – at least, from the standpoint of someone interested in inflation and inflation markets – was President Trump’s announcement of a new tariff on Canadian lumber. The new tariff, which is a response to Canada’s “alleged” subsidization of sales of lumber to the US (“alleged,” even though it is common knowledge that this occurs and has occurred for many years), ran from 3% to 24% on specific companies where the US had information on the precise subsidy they were receiving, and 20% on other Canadian lumber companies.

In related news, lumber is an important input to homebuilding. Several home price indicators were out today: the FHA House Price Index for new purchases was up 6.43% y/y, the highest level in a while (see chart, source Bloomberg).

The Case-Shiller home price index, which is a better index than the FHA index, showed the same thing (see chart, source Bloomberg). The first bump in home price growth, in 2012 and 2013, was due to a rebound to the sharp drop in home prices during the credit crisis. But this latest turn higher cannot be due to the same factor, since home prices have nearly regained all the ground that they lost in 2007-2012.

Those price increases are in the prices of existing homes, of course, but I wanted to illustrate that, even without new increases in materials costs, housing costs were continuing to rise faster than incomes and faster than prices generally. But now, the price of new homes will also rise due to this tariff (unless the market is slack and so builders have to absorb the cost increase, which seems unlikely to happen). Thus, any ebbing in core inflation that we may have been expecting as home price inflation leveled off may be delayed somewhat longer.

But the tariff hike is symptomatic of a policy that provokes deeper concern among market participants. As I’ve pointed out previously, de-globalization (aka protectionism) is a significant threat to inflation not just in the United States, but around the world. While I am not worried that most of Trump’s proposals would result in a “reflationary trade” due to strong growth – I am not convinced we have solved the demographic and productivity challenges that keep growth from being strong by prior standards, and anyway growth doesn’t cause inflation – I am very concerned that arresting globalization will. This isn’t all Trump’s fault; he is also a symptom of a sense among workers around the world that globalization may have gone too far, and with no one around who can eloquently extol the virtues of free trade, tensions were likely to rise no matter who occupied the White House. But he is certainly accelerating the process.

Not only do inflation markets understand this, it is right now one of the most-significant things affecting levels in inflation markets. Consider the chart below, which compares 10-year breakeven inflation (the difference between 10-year Treasuries and 10-year TIPS) to the frequency of “Border Adjustment Tax” as a search term in news stories on Google.

The market clearly anticipated the Trumpflation issue, but as the concern about BAT declined so did breakevens. Until today, when 10-year breakevens jumped 5-6bps on the Canadian tariff story.

At roughly 2%, breakevens appear to be discounting an expectation that the Fed will fail to achieve its price inflation target of 2% on PCE (which would be about 2.25% on CPI), and also excluding the value of any “tail outcomes” from protectionist battles. When growth flags, I expect breakevens will as well – and they are of course not as cheap as they were last year (by some 60-70bps). But from a purely clinical perspective, it is still hard to see how TIPS can be perceived as terribly rich here, at least relative to nominal Treasury bonds.

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