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Summary of My Post-CPI Tweets (January 2019)

January 11, 2019 Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy. Or, sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments or Enduring Intellectual Properties. 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.

  • A few minutes to CPI. Consensus 0.2%, 2.2% y/y on core, pretty much on the dot. That’s slightly lower on core than last month, which ALMOST rounded to 2.3%, but dropping off a strong Dec ’17. Remember Median is 2.82%, near the highs.
  • it will be hard to get a ‘handle surprise’ on core CPI today. But watch Apparel, which has been weirdly weak despite tariff tensions. Used cars/trucks has been strong for a couple months and is due to be back normal, but not to “retrace” as it was too low before.
  • In general, look at core goods, which last month went flat after a long time in deflation. And keep an eye on core-ex-shelter, which is near multi-year highs.
  • 21% on core, 2.21% y/y. Basically a consensus number.
  • Pretty stable last few months of core.

  • Core goods 0.1% y/y, down from 0.2% y/y last month. Core Services unch at 2.9% y/y.
  • Core goods right on schedule.

  • OER 0.23% m/m, dropping y/y because of base effects back to 3.22%. Had been a y/y bounce last year because of those base effects but now pretty much back to trend. Primary rents 0.20%, 3.48% y/y, also down.
  • Inflation bears will point at “Lodging Away from Home,” +2.74% m/m, and say that is an aberration. But it’s really just reversing a very weak recent aberration. Y/y up to 0.91%; had been -1.37%. So ignore those people.
  • Pharma was weak, at -0.43% m/m and -0.58% y/y.

  • Doctors services also remains fairly low. Hospital Services however accelerated to 3.67% y/y from 3.52% y/y. Overall, Medical Care was roughly steady at 2% y/y.

  • Used Cars and Trucks was -0.18%, dropping y/y to 1.43% vs 2.30%. It was due to decelerate, and that’s roughly in line.

  • Apparel is back to positive y/y, at +0.3% vs -0.6%, but that’s mostly base effects. Only very small rise this month. That continues to be a head-scratcher. I’d expect to see trade frictions show up in apparel quickly. But this is a Dec number, and so maybe stockpiling pre-xmas.
  • Core ex-housing was 1.50% y/y, down slightly from 1.53% y/y last month. That remains near 5-year highs, but still waiting for the break higher.
  • Core ex-shelter chart.

  • By the way, if you have kids I hope they’re girls. In apparel, Boys’ apparel is +13.1% y/y…Men’s footwear is +4.3%…nothing else is over +0.5%.
  • Recreation is a pretty small part of CPI (5.7%), but rose from 0.61% y/y to 1.16% y/y. Inflation in Cable and Satellite Services, Pets and Pet Products, and “Admissions” were the main culprits. Pets are “recreation?” I think of them more as Transportation. Or Food.
  • Just kidding.
  • College Tuition and Fees +2.7% y/y, up a small amount but continuing to run ahead of headline and core.
  • Looks like a regional housing index will be the median category this month, which means my median guess isn’t as sharp. My estimate is 0.23% m/m, making the y/y 2.80% down from 2.83%. Median is a better measure of inflation trend since it ignores outliers.
  • This is an important chart. It shows Median CPI (without today’s number, not out yet) vs 10-year inflation swaps. You can see how bearish the market has gotten recently. Some of this is oil but these are 10y swaps so that shouldn’t matter much.

  • I almost forgot to mention that Wireless telephone services weakened again to -3.19% from -3.03% y/y. More interestingly, Land-line went to -0.02% from 0.46%. Even more interesting, land-line spending is only about a third as large as wireless. Here’s a chart of landline.

  • Let’s wrap this up with the four-pieces charts. First piece is food & energy. Weirdly linear deceleration.

  • The piece I think is a very important story going forward: core goods. Out of deflation and I think it’s going higher. This is where trade tensions are most important.

  • Core services less Rent of Shelter…still look to be in a downtrend, mostly thanks to medical. If we’re going to have an inflation accident, it should also show up here.

  • Rent of Shelter. Going nowhere fast. And that means you’re not getting deflation any time soon.

  • Final thought: next month we drop off a +0.35% m/m from core (from Jan ’18), which means it is pretty likely we see a drop in core towards 2%. That makes a Fed hike harder. But then the comparisons get easier, as my 12-month m/m core CPI chart showed.
  • Core is unlikely to drop below 2% any time soon, and in my view we’re likely to see 2.5% before 1.9%, and median inflation above 3% before long. But the Fed has a couple months’ reprieve before the choices get tougher.
  • That’s all for today. Thanks for tuning in.

Today’s CPI number is an acceptable one for the Fed. Right on the screws, showing no unanticipated accelerations. But also, no decelerations! Next month, core should decelerate, but that is likely to be the last good news for a while on inflation. Now, there are some reasons to think that the upward trend on inflation might be ending sooner than I have thought, and I’ll get into those reasons over the next week or two. But for now, the story is that the Fed has some breathing room to stop and watch for a while, and avoid some critical Presidential tweets while seeming to be principled. The difficult test will come in a few months when inflation starts heading higher even while growth, and stock markets, head lower. It may well be that we have seen the last tightening for a while – if the Fed Chair were Bernanke or Yellen, they’d already be easing, but Powell seems to be made of sterner stuff (but read my prior post about whether there is a Powell put). However, it has been easy up until now, with growth strong enough to take some hikes, inflation heading the wrong direction, and rates below any semblance of neutral. The next year or two is where the Fed’s job gets difficult as they have to navigate crosscurrents.

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Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (December 2018)

December 12, 2018 1 comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy. Or, sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments or Enduring Intellectual Properties. 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.

  • Been a while since I did a live CPI dive here. Thanks to all of those who voted with their dollars over the last year and supported my private CPI tweets. It wasn’t enough to make a commitment to it, so I’m back to occasionally doing it free on this channel. Hope it helps.
  • I do it anyway for myself and Enduring Investments, so it’s not THAT big a deal to put it here if I happen to be in the mood. Anyway, hope you get some value. If so, think about whether I or Enduring can help your investment processes. Now for the walk-up.
  • Consensus calls for about 0.18% on core CPI today, with the y/y rising to 2.2%. The bouncy PPI helps the mood although the PPI itself doesn’t have much forecasting power for CPI.
  • in PPI there were clear freight and other upstream pressures though. We haven’t really seen much of this in CPI – no real trade/tariff effect yet e.g. Apparel is where I’d expect to see than and in core goods generally. But they’re still slightly in deflation.
  • I think there’s some upward risk to used cars and trucks, but there was a big jump last month so we could get a retracement of that before another move higher next month, or continue the ‘catch up’ to private surveys this month. Hard to tell on a month-to-month basis.
  • Lodging Away from Home took a dip last month and might be upside risk today. Medical Care is due to start rising again too. So in a minute, we will see!
  • Slightly stronger core than expected…0.21% when they were looking for 0.18%. But pretty close.

  • 21% on NSA core y/y.
  • Let’s see. Core goods went up to 0.0% y/y from -0.1%, so that’s moving in the expected direction. Another big month from Used Cars and Trucks, +2.37% m/m after +2.62% last month. y/y now up to 2.30%. It was negative just a few months ago.

  • Lodging Away from Home rose from -2.42% y/y to -1.38% y/y, as we got a small positive this month after a big negative last month. I’m still skeptical that hotel prices are in deflation but someone will yell “AIRBNB” loud enough like that’s an argument, so I’ll leave it there.
  • Hefty lift in Primary Rents. +0.36% m/m, bringing y/y to 3.61% from 3.57%. That’s news because lots of pundits have been decrying the end of the housing market and therefore housing inflation. These aren’t necessarily the same thing.
  • Apparel actually took another large fall m/m. This continues to make little sense in a tariffy world.

  • Some of that is dollar strength, sure. But I’m still surprised.
  • Medical was +0.37% m/m after -0.07%, so that came through as I expected/hoped. Y/y rose to 2.03% vs 1.71%. Both Pharma and Doctor’s Services rose nearly 0.5% m/m after declines last month. Interesting that despite this, and housing, core services were unch at 2.9% y/y.
  • Core inflation, ex-shelter rose to 1.53%, almost at the 2016 highs (1.61%). The disinflationary impulses are deep in the rear-view mirror now.

  • The Apparel breakdown is always so weird. Y/Y, “Boys’ apparel” is +11.9% while “Girls’ apparel” is -0.7%. Hokay.
  • Brace yourself for a big jump in Median. Looks like the median category is a housing subindex so my estimate won’t necessarily be accurate but it won’t be LOWER than 0.28% m/m and my best guess is 0.33% m/m pushing y/y median CPI to 2.83%. Won’t know for a few hours yet.
  • 83% if it happened would be basically back to the highs. So the question is, what’s keep Core Services from a bigger bounce if housing and medical care are both looking strong?
  • Motor Vehicle Insurance? This is 2.4% of CPI.

  • Health insurance rising again…we knew this was true on the wholesale level but seems to be coming thru retail as well. But CPI measures health insurance inflation in an odd way, too much to get into here.

  • Oh no. Are you kidding me? Wireless telephone services -3% y/y down from -0.5%y/y last month. *smh* Here we go again?

  • Currently triumph of hope over experience in stocks. This figure clearly puts the Fed squarely still in tightening mode. And I don’t expect any major easing of inflationary pressures soon.
  • Kind of a good reminder of how out over their skis the inflation shorts are here. With Median at 2.7% or 2.8% after today, here’s the core cpi curve from inflation swaps (calculated by Enduring Investments). X-axis is years. Tremendous confidence that the Fed will win.

  • Now, to be sure the hurdles for y/y core get higher over the next few months, with Dec ’17 at +0.24% m/m and Jan ’18 at +0.35% (remember that??), so core will probably not reach new highs until Q2. But there’s nothing here to give confidence that inflation is about to fall.
  • Let’s do the four pieces. For new followers, these four pieces are each roughly a quarter (0.2%-0.3%) of CPI. The first and most volatile is Food & Energy. We don’t spend a lot of time on this. No forecasting power.

  • Piece 2 is core goods, the smallest of these 4 pieces but the main thing that has kept inflation sedated over last half decade. Now out of deflation even with a strong dollar. Sustainable? In a de-coupling world, maybe.

  • Core services, less rent of shelter. long downtrend still in place. This includes stuff like medical care, but also wireless services. Which really ought to have its own category I’m starting to think!

  • Steadiest piece is Rent of Shelter. This is just coming back to model. No real upstream signs that this is about to roll over – it was just ahead of itself. Latest point is actually an up-wiggle.

  • One more chart. The weight of the distribution of y/y changes. You can see the big bars for housing but the long tail. The bar at left is mostly food, energy, tech, and apparel at the moment. Without those categories, CPI is around 2.8%, right around median.

No real reason to wrap this one up – the numbers speak for themselves. Despite the weakness in energy, which is killing the inflation markets (since energy is most of the volatility in headline inflation, to which TIPS and inflation swaps are tied), prices in general continue to rise and if anything seem to be gaining a little steam even outside of housing. Housing inflation isn’t likely to move very far in either direction for a while from the current level, so the next movement in core or median CPI is going to come from core-ex-shelter categories like Medical Care (possibly looking up), Apparel (quite heavy), and other core goods like autos.

But there’s no reason whatsoever in these numbers to indicate to the Federal Reserve that it’s time to stop raising rates. To the extent that they begin to chirp about a pause, it’s because they want stock prices to go up (or, I guess, more accurately they just don’t want to be blamed for the bear market). Yes, growth is slowing but no formulation of the Taylor Rule is going to give a lot of cover to a decision to ease off of rate hikes when the policy rate is below the current rate of inflation.

Summary of My Post-CPI Tweets (October 2018)

October 11, 2018 Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guyPV and get this in real time, by going to PremoSocial. Or, sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments or Enduring Intellectual Properties. 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.

  • Only 20 minutes to CPI!
  • This month, we are looking for something of a correction to last month’s terribly weak and surprising core CPI (0.08% m/m).
  • Recall that last month, Apparel plunged -1.6% m/m – which seems at odds with a world of higher landed costs due to tariffs.
  • The only way that would make sense is if BLS were backing out the tariffs from the retail prices, but this isn’t like sales tax – no good way to disentangle tariffs since some products have ’em and some don’t.
  • So Apparel prices are due for a bounce. That’s well-understood out there in inflation land I think.
  • The apparel plunge was the driving force pushing core goods to -0.2% y/y when it had gotten all the way up to 0.0% y/y the prior month. It’s hard to get a lot of inflation without core goods being positive!
  • Other parts of core goods remain perky, such as Used Cars and Trucks. Probably some further gains due there.
  • The core services component was also soft last month, as OER softened slightly (but it has a big weight) and medical care declined.
  • I’m starting to get less confident that Medical Care will have a big upswing because of work I’m doing in pharma inflation. But at the same time, the y/y looks like it may have fallen too far too fast. And I don’t think doctors’ services +0.8% y/y makes a lot of sense.
  • All in all, the odds I think favor a solid 0.2% or above. This would cause y/y core to reaccelerate from 2.19% back to the 2.3% range b/c we’re dropping off an 0.13% from last Sept. To get a 2.4% print on core, we’d need 0.29% or better m/m, which is a stretch.
  • …but not out of the question if last month’s surprises are totally reversed.
  • The bottom line I am really watching is core-ex-shelter, which has been rising and is the key to the next leg higher in inflation. Housing won’t carry the water.
  • We’re down to about 12 minutes here before the number and one thing I want to add: more than recent CPIs this is likely a pretty important number for the stock market. Climbing CPI –> higher rates;stocks aren’t handling that well right now. A soft CPI is really good for stocks.
  • Ordinarily equities ignore CPI, but maybe not today.
  • One last point to make is that even with the weak month last month, core CPI is up at a 2% annualized pace over the last quarter. Median is at 2.5% annualized over the last 3 months. So we’re not talking deflation here.
  • Another very soft CPI. 0.116% on core. As that is roughly in line with what’s dropping off from a year ago, y/y core stays about the same at 2.2%.
  • First glance is that Apparel bounced but OER was weaker. If that’s true then this isn’t as weak as it looks.
  • 2.17% y/y on core, down from 2.18%, so as I said basically unch.
  • No doubt however that this is a huge relief to stocks. Even if it is stronger than it looks on the surface, it’ll help take the Fed off the relative boil (not like they’ve been crazy hawkish, just by recent standards)!
  • Incredibly, the subcomponents are AGAIN being slow-rolled by Bloomberg and this time looks like that’s because the BLS is being slow releasing the data. Crazy. Someone get them a new laptop.
  • Yayy! Finally getting data. So Apparel was +0.93% m/m, which raised y/y from -1.41% to -0.55%. Partial retracement and makes more sense. Only 3% of the CPI basket but a big move makes some difference.
  • Ah, here’s the thing. There was a MASSIVE decline in CPI-Used Cars of -2.99% m/m. That’s completely absurd. It puts y/y to -1.47% from +1.25% in that category, pushes core goods from -0.2% to -0.3%, and dampened overall CPI.
  • But it makes NO SENSE. Private surveys of used vehicle prices are still rising at around 4% per year. This is complete nonsense.
  • Here’s the chart. Used cars had been closing the gap. Again, this is nonsense. And it’s a big enough category to matter some.

  • Moving on…OER was only 0.18% m/m, pushing the y/y to 3.27% from 3.33%. Primary Rents were 0.24% m/m, 3.63% y/y up from 3.61%.
  • The OER modest deceleration isn’t terribly problematic although home prices are still rising quickly enough that I wouldn’t expect it to get much slower than it currently is. Primary Rents still rising, which puts the cherry on that point.
  • Lodging Away from Home plunged -1.01% m/mm, so the y/y dropped to 0.57% from 2.34%. Large moves in that index aren’t terribly unusual, so this isn’t an “AirBnB effect.” Will probably be reversed next month.
  • Back of the envelope by the way (and I know I’m refusing to let cars go again) is that Used Cars cost about 0.075% on core CPI. Put that back and your 0.116% becomes 0.191% m/m…right on expectations.
  • Medical Care remains weak. Pharma -0.19% m/m, but rises to 1.17% y/y from 0.77% because of base effects. Doctors’ Services 0.26% m/m, with y/y up to 0.46%..not exactly running away. And Hospital Services softened to 3.79% y/y from 4.17%.
  • BUT, because of those base effects, Medical Care overall rose to 1.73% y/y vs 1.54%.
  • doctors’ services:

  • Forgot to update this chart, last 12 core CPI prints. Although, as I said, this one is bogus.

  • Core ex-housing, even with the cars nonsense (he really just won’t let it go, will he??), accelerated to 1.38% from 1.34%. That’s still below the 1.5% hit in July, but we’d be just about there without those cars you know.
  • Here’s core ex-shelter. If you think the Fed is “going crazy” tightening, it’s because of this. Right about in the middle of the last two decades’ range. But I think it’s heading up.

  • All this talk about used vehicles…I should note that New Vehicles rose to 0.47% from 0.30% y/y. Placidly approaching the upper end of the range.

  • For something completely different, there was a rise in Cable & Satellite television service this month after a long slide. That’s 1.5% of the overall CPI…about 3/4 the weight of used cars!

  • So let’s see…m/m largest declines were …hey! Used Cars and Trucks #1, Footwear #2, and Lodging Away from Home #3. We’ve discussed two of those. Biggest gainers were Mens/Boys Apparel (retracement), Car & Truck Rental (splutter), and another couple of apparel categories.
  • Now, here’s why I prefer Median CPI. It’s totally for months like this. Median this month ought to be around 0.22%, meaning y/y should be almost exactly unch at 2.77%. As always, my Median is an estimate, but it should be pretty good this month.
  • And that’s the REAL story – inflation continues to motor along at about 2.8%, when measured using an index that isn’t perverted by inaccurate surveys of cars.
  • So here’s the summary. Great number for stocks, because they don’t care about the details. It’s not really a soft number, though – all one category. Core goods at -0.3% really ought to be at 0.3% or 0.4% (see chart), and assuming it does converge there we’ll see core CPI resume.

  • But you don’t really need Core CPI because Median is already telling you what you need to know: inflation is in the high 2s. The rebound from last year is over, and last few numbers have been basically flat around 2.8%.
  • Same story in this chart, showing the weight of categories inflating faster than 3%. It’s pretty steady and has been for a while. This is why we were able to ‘look through’ the 2017 slowdown in core CPI. The middle of the distribution was stable/rising slightly.

  • The key question for the next leg, up or down, is what happens to core goods. Housing, as I wrote recently, is not about to accelerate or decelerate in a MAJOR way. The next leg will have to come from other categories catching up.
  • With a following wind from clearly-rising wages and “protection” from offshore price competition, this seems very probable. Ergo, I expect Median to be over 3% in the next quarter or two. We’re not talking hyperinflation, but it’s going to keep creeping higher.
  • People sometimes ask me, “don’t you think the Fed knows how to look through the CPI to see what’s really going on?” The answer is no, I do not. I’ve yet to find a Fed person who gets very down and dirty with the data in a way that’s illuminating (as opposed to a wonky model).
  • OK, to wrap this up let’s look at the four pieces charts and tell the story (for new followers: these four pieces are each around 1/4…actually 0.2-0.33…of overall CPI). First, Food & Energy.

  • Next, Core Goods. Already discussed. This should be, and will be, higher.

  • Core Services less Rent of Shelter. A lot of this is Medical Care Services and I’m less bullish on that than I have been. It would help the bull-inflation story to see this above 3%, but I’m just not sure it can get there in short order.

  • Finally, Rent of Shelter. It’s probably a bit below where it should be, but as I recently wrote it’s not going to be doing anything dramatic here for a while.

  • That’s all for today. I just want to conclude by saying that it is a NATIONAL EMBARRASSMENT that we can’t accurately measure the behavior of used car prices. Not to put too fine a point on it.
Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (July 2018)

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guyPV and get this in real time, by going to PremoSocial. Or, sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments or Enduring Intellectual Properties. 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.

  • OK, 15 minutes to CPI. Here goes.
  • Last mo, we had an 0.17% on core m/m, exactly on expectations but after a weak 0.10% in April.
  • The Dec/Jan 0.24%/0.35% seem far away, but even farther away are the 0.14%s of last June and July. That is, comps remain relatively easy.
  • Really no big surprises last month. Still haven’t seen core goods acceleration or any sign of tariff effects. Core ex-housing is rising but still quite low.
  • In fact, I think the big story going forward, not this month per se but for the balance of the year and 2019, is what happens to core goods prices. With trucking prices rising aggressively, tariffs up and globalization down, I’d expect to see movement there.
  • In that vein, keep an eye on Apparel, which though small is an important signal on core goods.
  • This month, economists are looking for 0.18% on core, pushing y/y JUST BARELY to 2.3% with rounding. The consensus nailed it last month.
  • My thesis is that we should be seeing more core inflation than that going forward. So far, that thesis has been unrewarded but I really didn’t expect a whole lot to come through until the second half. This first half was just catching up from base effects of 2017.
  • You can see that median is basically back on the slow uptrend from 2014-15-16-17. Inflation will keep rising. The only question (which would be a scary outcome) is whether it accelerates past that former trend into a new self-feeding inflation cycle. No sign of that yet.

  • Just 5 minutes til showtime.
  • 16% m/m on core, just barely pushing y/y to 2.3%, 2.255% to three decimals on the NSA core index…
  • Bloomberg being really slow posting subcomponent info.
  • Here’s the last 12 core CPIs. Certainly nothing seems terribly alarming here on the surface.

  • OK, Bloomberg. Gonna scrape the data myself. BRB.
  • Breakevens are unimpressed. 10y breaks were +1 before the number, mostly a reaction to the energy plunge and rebound, and are +0.5 now. But sometimes takes a bit for people to dive into the numbers.
  • ..so we see Used cars and trucks are +0.72% m/m, yay! Finally some movement. Still -0.66% y/y, so not showing the inflation of the private surveys. Private surveys have noted some shift in used car composition, and it may be that the BLS just isn’t correcting for that.
  • Owners’ Equivalent Rent was +0.25% m/m for the second month in a row, but that caused y/y to decelerate to 3.37% from 3.41%. That’s interesting because last month the rise in OER was a big chunk of the rise that we got so…something else was moving this month.
  • Primary Rents also decelerated, to 3.58% from 3.63%. That’s actually lower than the y/y has been for a while as this continued to decelerate. But it’s not going to collapse while housing prices continue to boom.
  • Medical Care accelerated further, to 2.45% from 2.38% y/y. That’s not as big a jump as last month, but it’s the right sign. Still low. Pharma retreated a bit but doctor’s services picked up the slack.

  • Apparel dropped on the month, pushing y/y down to 0.6% from 1.4%. So canary on core goods is still chirping.
  • Bloomberg still hasn’t updated the core goods and core commodities figures…odd. Anyway, they’re -0.2% on core goods (tiny acceleration) and 3.1% on core services (tiny acceleration) on a y/y basis.
  • Lodging Away from Home, which surged last month to 4.4% y/y, plunged to 1.6% y/y this month.
  • Core ex-shelter rose to 1.41%, highest since mid-2016. That’s still low, but it’s what we want to watch along with core goods. It hasn’t been above 2% since 2012. Hasn’t even been close.

  • This is interesting…wireless telephone services inflation is positive. It’s not like that NEVER happens but this time we might go higher. After you go to infinite data…how do you improve quality dramatically? And it’s quality that drives this series lower.

  • Core goods’ rise is encouraging for inflation…but still a ways to go before it gets to +1%. However it’s on model at the moment.

  • Will have the four-pieces charts in a moment. But while I’m waiting on the calculator…this month’s data is interesting because it was not housing. Some of the rise in core was due to new and used cars rebounding, but not enough to offset the deceleration in housing. >>
  • That may mean that inflation is broadening to more categories outside of the ones that have been driving inflation for a while. Core ex-shelter’s rise is something to watch. That’s what inflation actually looks like – it’s not dramatic, and not isolated in a few categories.
  • inflation markets are tres unimpressed. 10y breakevens now down on the day.
  • We’re not really seeing a broadening in this diffusion measure, so it may just be that the left-tail deflationary stuff is going away. A tightening of the distribution, that is.

  • OK four pieces. Piece 1: Food & Energy. Good for owners of TIPS, but mean-reverting so we mostly ignore for forecasting.

  • Core goods, Piece 2, I’ve already shown. Rising and will keep rising.

  • Piece 3: Core services less rent of shelter. Starting to look interesting. The 3% level is key.

  • Piece 4: Rent of Shelter. Still elevated. It’s done the heavy lifting on inflation for a while and probably won’t do much more for a while. Continued acceleration in core will rely on ex-shelter core services, and on core goods. Both of which seem to be rising.

  • Bottom lining: Once again, no big surprises here and nothing that will alter the Fed’s trajectory. But the underlying pressures here are pretty clear and show no signs of waning. We are not going to gently converge on 2% core PCE.
  • What I said at the beginning remains the key question: are we just going back to the rising – but slowly rising – inflation trend from 2014-2017, or will we start to accelerate above that trend?
  • Acceleration above that trend would be very concerning, unless it was caused by one-offs (like cell phones and other one-offs caused the 2017 departure on the downside). It would indicate that inflation has moved into a self-reinforcing phase.
  • I suspect that’s where we are headed. But so far, the evidence that we are there doesn’t exist (there’s no contrary evidence either – it’s just unknown at this point).
  • Early look at median…my estimate is 0.23% m/m. If I am right, this takes the y/y to 2.80%. This will be really dramatic!
Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (June 2018)

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guyPV and get this in real time, by going to PremoSocial. Until the end of June, you can get $9.99 off (one month free, or a discount off the already-discounted annual plan) by using code “tryme”. Or, sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments or Enduring Intellectual Properties. 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.

  • 27 minutes to CPI! Here are my pre-figure thoughts:
  • Last month (April CPI) was a big surprise. The 0.098% rise in core was the lowest in almost a year, rewarding those economists who see this recent rise as transitory. (I don’t.)
  • But underneath the headlines, April CPI was nowhere near as weak as it seemed. The sticky prices like housing were stronger and much of the weakness came from a huge drop in Used Cars and Trucks, which defied the surveys.
  • Medical Care and Apparel were also both strong last month.
  • Now, BECAUSE the weakness was concentrated in a small number of categories that had large moves, median inflation was still +0.24% last month, which drives home the fact that the underlying trend is much stronger than 0.10% per month.
  • The question this month is: do we go back to what we were printing, 0.18%-0.21% per month (that’s the 2 month and 6 month avg prior to last month, respectively), or do we have a payback for the weak figure last month?
  • To reiterate – there were not really any HIGH SIDE upliers to potentially reverse. Maybe housing a touch, but not much. To me, this suggests upside risk to the consensus [which is around 0.17% or so and a bump up (due to base effects) to 2.2% y/y].
  • I don’t make monthly point forecasts, but I would say there’s a decent chance of an 0.21% or better…which number matters only since it would accelerate the y/y from 2.1% to 2.3% after rounding. So I agree with @petermcteague here, which is a good place to be.
  • Note there’s also the ongoing risk each month of seeing tariffs trickle through or trucking pressures start to diffuse through to other goods prices. Watch core goods.
  • So those are my thoughts. Put it this way though – I don’t see much that would cause the Fed to SLOW the rate hike plans, at least on the inflation side. Maybe EM or something not US economy-related, but we’d have to have a shockingly broadly weak number to give the FOMC pause.
  • Starting to wonder why we even both with an actual release. Economists nailed it, 0.17% m/m on core, 2.21% y/y.
  • That’s a 2.05% annualized increase. Which would be amazing if the Fed could nail that every month.

  • Core goods accelerated to -0.3% from -0.4%, so the jump there hasn’t happened. Core services moved up to 3.0% from 2.9%. That is the highest core services since Feb 2017, but not absurd.
  • still waiting on core goods acceleration…

  • Used cars and trucks again dropped sharply. -0.89% after -1.59% last month. That’s m/m. The y/y is -1.68%. Again, that’s at odds with all of the private surveys and is a big disconnect. I can’t explain it.
  • Owners’ Equiv Rent put in another solid month +0.25% m/m, up to 3.41% y/y. Starting to get a bit ahead of our model again.

  • Large jump in lodging away from home, 2.93% m/m. That takes the y/y to 4.29%. LAFH is only 0.9% of CPI, but that’s an outlier that will probably come back next month.
  • Medical Care scored a solid 0.2%, accelerating to 2.38% y/y.

  • Pharma (3.73% vs 2.65%), Doctor’s Services (0.55% vs 0.31%), and Hospital Services (4.74% vs 4.49%) all accelerated.
  • Apparel was flat on the month, but that moved y/y up to 1.4% vs 0.8%.
  • Neither stocks nor breakevens care about this figure. Summer has set in. It used to be that the summer lull was a couple of weeks in August. Then it went to all of August as the US mirrored Europe. Now it pretty much starts in June and lasts until Labor Day.
  • I forgot to mention Primary Rents, by the way. They actually decelerated to 3.63% y/y from 3.70%, which takes some the sting out of a potential OER reversal. The Primary Rents move was countertrend so it should also retrace next month. But only 1/3 of the weight of OER.
  • The Primary Rents move does tend to reinforce the message of our model, that OER is a tiny bit out over its skis. However as that chart illustrated, it can diverge a bunch from our model.
  • Biggest m/m declines were in Car and Truck Rental and Public Transportation (what’s up with vehicles??), followed by Mens and Boys’ Apparel. I’ve mentioned Used Cars and Trucks. Household Furnishings also weak.
  • Biggest m/m increases are the aforementioned Lodging Away from Home, Infants and Toddlers’ Apparel, Motor Fuel, and Medical Care Commodities (mostly Pharma).
  • All of the median categories are Rent and OER subcategories which are hard to get a read on, but median should again be mid-0.2s, probably 0.26-0.27% m/m pushing y/y to nearly 2.7% on Median CPI! Last mo was highest since 1/09; this would be highest since 2008.
  • This is median BEFORE today’s figure, which will come later. And I could be wrong about it.

  • Core ex-housing, something worth watching especially since housing seems back in an uptrend, rose to 1.29% from 1.21%. That’s the highest since Jan 2017, but it hasn’t been higher than 1.61% since early 2013. Right now can still claim it’s a housing story.
  • Putting together the four-pieces charts.
  • Still not much action in inflation markets. From the swap curve: US #Inflation mkt pricing: 2018 2.2%;2019 2.2%;then 2.3%, 2.4%, 2.4%, 2.4%, 2.5%, 2.5%, 2.4%, 2.5%, & 2028:2.5%.
  • Four Pieces: Food & Energy first. Roughly 21% of CPI.

  • Core Goods, about 19% or so of CPI. Rising very slowly. If core inflation is to reach ‘escape velocity’ this needs to rise a fair amount. Tariffs will help that, eventually.

  • Core services, less rent of shelter. About 27% of overall CPI. Lot of medical care here, which as we expected has been pulling this higher. Again, for CPI to reach escape velocity you’d want to see this above 3%.

  • And the big kahuna, housing, about 1/3 of overall CPI. Had a steady run-up, got ahead of itself and came back to model, and now is accelerating again. Housing indeed looks tight, and this should continue especially if wages continue to accelerate.

  • Diffusion look at inflation is still pretty dull. Slightly less than half of all categories of CPI are accelerating faster than 3%. But that’s been very consistent between 40% and 50% (obviously at ~50%, median CPI would be at 3%).

  • OK, last overall point. May was an easy hurdle to get an acceleration in y/y, as May 2017 was only +0.08. June and July of last year were both +0.143%, so again we should see more acceleration. Y/y core CPI should be at 2.3% next mo & hit 2.4% in Sept just on base effects.
  • …that’s merely assuming 0.2% per month from core CPI, which is between what TTM core says it is and what median stays it is. If we print just a smidge above 0.2% per month we could hit 2.5% in November. Again, that’s assuming no big acceleration in underlying pressures.
  • I happen to believe there ARE some underlying pressures so I think we’ll hit 2.5% sooner than that and median will press 3%. Nothing super alarming for the Fed, but somewhat discomfiting. The real test will be once we hit Dec and Jan and those hard comps.
  • That’s all for today. Thanks for tuning in, and thanks for subscribing to the modestly-priced premium channel. I really appreciate your voting with your dollars in this way!

Breakevens eventually did care a little bit, rising a tick or so. Market-wise, today’s number continues to do two things. First, it doesn’t really give any reason for the Fed to arrest or delay its current plans to gradually hike overnight rates. There was no surprise here – this is still all very much in the realm of base effects as we drop off the strange deceleration from last year. Second, there’s really no reason for interest rates in the US to stay below 3%. In an expanding economy with accelerating inflation which is already at 2.2%, or 2.7% on median, a 3% nominal yield makes little sense. Real yields, and nominal yields, are too low. So, honestly, are breakevens…inflation swaps are showing forward expected inflation rates of no more than 2.5% out for many years, even though median inflation (and headline inflation!) is already above that level. You have to have a great deal of faith in an untested hypothesis – the idea that inflation expectations will be ‘anchored’ and overwhelm any effects from tariffs, actual production bottlenecks, and monetary largesse, to keep inflation low and steady – to be actively shorting inflation at these levels, and if you’re buying Treasuries at yields below 3% you are actively betting on inflation declining.

If it seems a strange time to be making that bet, I agree with you. But market sentiment is clearly biased in favor of a belief that the weather will always be sunny and warm and that neither inflation nor commodities will go higher, or equities or bonds lower, from these levels. The contrary evidence about inflation, anyway, continues to build and to my mind it requires an increasing effort of will to ignore that evidence.

Summary of My Post-CPI Tweets (May 2018)

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guyPV and get this in real time, by going to PremoSocial. Or, sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments or Enduring Intellectual Properties. 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.

  • OK, 20 minutes to CPI. Let’s get started.
  • Although chatter isn’t part of the CPI, it’s interesting to me as a CPI guy. The chatter seems less this month than last month (maybe because of two readings <0.2%). I guess no easy ‘cell phone story’ to latch onto.
  • Last month there was of course that talk about cell phones, and the jump in core did excite breakevens…a little. 10y breaks now at 2.18%, highest in 4 years. But, as I recently pointed out, You Haven’t Missed It.
  • Consensus expectations this month are for 0.19 on core or a little softer. Y/Y will rise to 2.2% if core m/m is 0.13 or above. Outlier of 0.23 would move us to 2.3% and be a surprise to many.
  • Average over last 6 months is 2.56% rate. I saw a funny article saying ‘but that’s due to cell phones.’ Of course, the m/m rate is not due to cell phones dropping off from March of last year. Median CPI is at 2.48%. So this is not the new normal. It’s the old normal.
  • No one is much more bullish than expecting an 0.2% every month…that’s a 2.4% annually; most economists see that as something close to the high of sustainable inflation. But again, that’s the old normal. It just seems new because it has been a LONG time since we’ve been higher.
  • They’re wrong on that! Just not sure how soon this all comes through.
  • So last month, in addition to the bump in core services y/y (because of cell phones), core goods also moved to -0.3% from -0.5% and -0.7% the prior mo. The lagged weakness in the dollar, along with the rise in goods prices caused by trucker shortages, should be showing up here.
  • Lodging Away from Home took a big y/y jump last month, but it’s a volatile category with a small weight. It’s usually an excuse to people who expected something different on the month.
  • I continue to watch medical care, which is important in core services. Doctor’s services still showing y/y inflation as of last report, but both Doctors Services and Hospital Services rose last mo.
  • 15 minutes until the number!
  • Buying in the interbank market for the monthly reset (for headline) is 250.68.
  • Very weak number. 0.10% on core CPI. y/y ticks up only slightly, to 2.12% from 2.11%.
  • Last 12. Surprising. Note that last April was 0.09% so might be some seasonal issue with April. Sometimes Easter plays havoc, and Easter was early. But that’s usually more a Europe thing.

  • Massive drop in CPI for Used Cars and Trucks. -1.59% m/m, taking y/y to -0.9 from +0.4. That’s odd – very different from what the surveys are saying.
  • The Mannheim Survey actually ticked UP this month.

  • I don’t usually start with Used Cars & Trucks but that jumped out. That’s 2% of the CPI so not negligible.
  • OER m/m was 0.33% vs 0.31% last mo. y/y rose to 3.36% vs 3.26%. Lodging away from home was 0.74% m/m, following 2.31% last mo. And Primary Rents accel to 3.69% y/y from 3.61%. Housing strong.
  • Medical Care 2.21% y/y vs 1.99%. Also strong. Apparel 0.77% vs 0.27%. Recreation 0.27% vs 0.61%, and “other” a little softer. But wow, could this all be used cars? It looks like a strong number on the internals.
  • 10-year Breakevens are down 2bps. But I think they’re going to come back. This doesn’t look like the weak print we saw at first. Although I’m still drilling.
  • CPI Medical. Should keep rising.

  • That’s driven by physician’s services, out of deflation. hospital services still trendless around 4.5%

  • But don’t let them tell you this is unusual. It’s a large jump for OER to be sure, but housing prices continue to accelerate higher. Not at all surprising to see rents and OER stop decelerating.

  • here’s OER vs our model.

  • The Housing major subcategory didn’t rise very much, because Household Energy was weak.
  • Also interesting is CPI Apparel, 0.77% y/y…highest since a burp in Jan-2017 but it hasn’t been sustainably above that level since 2013. However, weak dollar shows up here, and conflict with China?
  • College Tuition stable at 1.90%. I can’t stop staring at the Used Cars number. It’s like a…well…car wreck.
  • Wireless telephone services almost back inflating again!

  • Biggest declines on the month, in core categories of weight>1%: Public Transportation, then Used Cars & Trucks, then New Vehicles, then Recreation.
  • Biggest gainers: Women’s & Girls’ apparel, Household Furnishings and Operations. Not many upside outliers, in other words.
  • And folks, that means Median isn’t going to be as soft. My early guess is 0.22, bringing y/y to virtually match last February’s cycle high at 2.58% or so. That’s what’s really going on. Median category is housing so could be + or – small from my est.
  • Breakevens 1.25bps off the lows. It’ll probably keep going. This is not a weak number in my view.
  • Even CPI-leased cars decelerated. Someone hates cars this month.

  • Today’s report is brought to you by the Young & Restless.
  • Four pieces charts. Food & Energy flat

  • Core goods actually dropped a tenth. Culprit…I dunno…maybe CARS?!?

  • Core services less rent of shelter…stable at 2.32% y/y

  • And the big story on the upside – and less shocking than cars – rent of shelter.

  • Now, the core CPI figure – and the fact that the main upward move was from housing, which is underrepresented in core PCE – means the Fed has less urgency to tighten faster, for now. Median tells a different story.
  • This month, we rolled off an 0.09% from April 2017 and replaced it with an 0.10%. Next month, we will roll off an 0.08% from May 2017. And the next two months after that are 0.14%. Ergo, core will keep rising.
  • Should have gotten to 2.2% on core this month, and didn’t thanks to CARS. But will next month, and 2.3% the month after that, and 2.4% a month or two after that.
  • Markets are just about discounting CURRENT inflation (the chart shows CPI swaps, which aren’t biased lower like breakevens, and Median through last month). But still not discounting FUTURE inflation and no tail-risk premium to them either.

  • US #Inflation mkt pricing: 2018 2.2%;2019 2.2%;then 2.4%, 2.4%, 2.5%, 2.5%, 2.4%, 2.4%, 2.5%, 2.5%, & 2028:2.5%.
  • That’s all for now. Thanks for tuning in!

Today’s CPI report was a strong number masquerading as a weak number. The core figure was polluted by a large one-off move lower in inflation for cars – a move that is, moreover, not evident in private surveys. The fact that this is a one-off caused by an outlier was driven home a few hours later by the Cleveland Fed, who calculated the Median CPI at +0.24%, which pushed the y/y median CPI to 2.60%. That’s the highest level since January 2009, and it underscores that we are really seeing acceleration beyond merely retracing the cell phones and other one-off moves from 2017. On the upside of today’s report was housing, which took a surprising jump higher. But what was surprising was not the rise, but the magnitude of the jump. Housing prices continue to rise, and the rate of increase has been accelerating. There is no question that rising housing prices tend to pressure rents higher, and so the direction is not a one-off. Arguably, the one-month movement was “too much,” but it may have been retracing prior softness as well. The movement in rents took the series away from our model a touch, but there’s nothing saying our model is the “right” answer!

But the right answer overall is that inflation is accelerating. Some of this was simply baked in the cake as easy comparisons cause the y/y number to rise. But not all of it. The question going forward is whether inflation crests here, between 2.2%-2.4% on core CPI and 2.5%-2.7% on median, or carries further. My belief is that it has further to run.

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (Apr 2018)

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guyPV and get this in real time, by going to PremoSocial. Or, sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments or Enduring Intellectual Properties. 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.

  • After a couple of weeks of relative quiet on the inflation theme, it seems people the last few days are talking about it again. Big coverage in the Daily Shot about the underlying pressures.
  • I don’t normally pay much attention to PPI, but it’s hard to ignore the momentum that has been building on that side of things. In particular, the medical care index that PCE uses has been rising rapidly in the PPI. Doesn’t affect us today w/ CPI but affects the Fed convo.
  • But back on CPI. Of course the main focus this month for the media will be the dropping off of the -0.073% m/m figure from March 2017, which will cause y/y CPI to jump to around 2.1% from 1.8%. It’s a known car wreck but the reporters are standing at the scene.
  • That year-ago number of course was caused by cell phone services, which dropped sharply because of the widespread introduction of ‘unlimited data’ plans which the BLS didn’t handle well although they stuck to their methodology.
  • Consensus expectations for this month are for 0.18% on core, which would cause y/y to round down to 2.1%. (Remember that last month, core y/y was very close to rounding up to 1.9%…that shortfall will make this month look even more dramatic.)
  • It would only take 0.22% on core to cause the y/y number to round UP to 2.2%, making the stories even more hyperventilated.
  • I don’t make point estimates of monthly numbers, because the noise swamps the signal. We could get an 0.1% or an 0.3% and it wouldn’t by itself mean much until we knew why. But I will say I think there are risks to a print of 0.22% or above.
  • First, remember the underlying trend to CPI is really about 0.2% anyway. Median inflation is 2.4% and after today core will be over 2%. So using the last 12 months as your base guess is biased lower.
  • Also, let’s look back at last month: Apparel was a big upside surprise for the second month in a row, while shelter was lower than expected. But…
  • But apparel was rebounding from two negative months before that. We’re so used to Apparel declining but really last month just brought it back up to trend. And with the trade tensions and weak dollar, am not really shocked it should be rising some.
  • Apparel is only +0.40% y/y, so it’s not like it needs to correct last month.
  • On the other hand, OER decelerated to 0.20 from 0.28 and primary rents decelerated to 0.20 from 0.34, m/m. But there’s really no reason yet to be looking for rent deceleration – housing prices, in fact, are continuing to accelerate.

  • No reason to think RENTAL costs should be decelerating while PURCHASE costs are still accelerating. Could happen of course, but a repeat of last month’s numbers is less likely.
  • Finally – this gets a little too quanty even for me, but I wonder if last month’s belly flop in CPI could perturb the monthly seasonal adjustments and (mistakenly) overcorrect and push this month higher. Wouldn’t be the first time seasonals bedeviled us.
  • I don’t put a lot of weight on that last speculation, to be clear.
  • Market consensus is clearly for weakness in this print. I’m just not so sure the ball breaks that way. But to repeat what I said up top: the monthly noise swamps the signal so don’t overreact. The devil is in the details. Back up in 5 minutes.
  • ok, m/m core 0.18%. Dang those economists are good. y/y to 2.12%.
  • After a couple of 0.18s, this chart looks less alarming.

  • OK, Apparel did drop again, -0.63% m/m, taking y/y to 0.27%. So still yawning there. Medical Care upticked to 1.99% from 1.76% y/y, reversing last month’s dip. Will dig more there.
  • In rents, OER rose again to 0.31% after 0.20% soft surprise last month, and primary rents 0.26% after a similar figure. y/y figures for OER and Primary Rents are 3.26% and 3.61% respectively. That primary rent y/y is still a deceleration from last mo.
  • Core services…jumped to 2.9% from 2.6%. Again not so surprising since cell phone services dropped out. So that’s the highest figure since…a year ago.
  • Core goods, though, accelerated to -0.3% from -0.5%. That’s a little more interesting. It hasn’t been above 0 for more than one month since 2013, but it’s headed that way.

  • Within Medical Care…Pharma again dragged, -0.16% after -0.44% last month…y/y down to 1.87% from 2.39% two months ago. So where did the acceleration come from?
  • Well, Hospital Services rose from 5.01% to 5.16% y/y, which is no big deal. But doctors’ services printed another positive and moved y/y to -0.83% from -1.27% last month and -1.51% two months ago. Still a long way to go there.

  • Oh wait, get ready for this because the inflation bears will be all about “OH LODGING AWAY FROM HOME HAD A CRAZY ONE-MONTH 2.31% INCREASE.” Which it did. Which isn’t unusual.

  • Interestingly those inflation bears who will tell us how Lodging Away from Home will reverse next month (it will, but hey folks it’s only 0.9% of the index) are the same folks always telling us that AirBnB is killing hotel pricing. MAYBE NOT.
  • Finally making it back to cars. CPI Used cars and trucks had another negative month, -0.33% after -0.26% last month. That really IS a surprise: we’ve never seen the post-hurricane surge that I expected.

  • Sure, used cars are out of deflation, now +0.37% y/y. New cars still deflating at -1.22% vs -1.47% y/y last month. But that really tells you how bad the inventory overhang is in autos. Gonna suck to be an auto manufacturer when the downturn hits. As usual.
  • Leased cars and trucks, interestingly (only 0.64% of CPI) are +5.26% y/y. Look at that trend. Maybe that’s where the demand for cars is going.

  • Oh, how could I forget the star of our show! Wireless telephone services went to -2.41% y/y from -9.43% y/y last month. Probably will go positive over next few months – a real rarity! But after “infinity” data where does the industry go on pricing? Gotta be in the actual price!
  • College tuition and fees: 1.75% y/y from 2.04%. Lowest in a long time. This is a lagged effect of the big stock and bond bull market, and that effect will fade. Tuition prices will reaccelerate.
  • Bigger picture. Core ex-housing rose to 1.23% from 0.92%. Again, a lot of that is cell phone services. But deflation is deep in the rear-view mirror.
  • While I’m waiting for my diffusion stuff to calculate let’s look ahead. We’re at 2.1% y/y core CPI now. The next m/m figures to “roll off” from last year are 0.09, 0.08, 0.14, and 0.14.
  • In other words, core is still going to be accelerating optically even if there’s no change in the underlying, modestly accelerating trend. Next month y/y core will be 2.2%, then 2.3%, then 2.4%. May even reach 2.5% in the summer.
  • This is also not in isolation. The Underlying Inflation Gauge is over 3% for the first time in a long time. Global inflation is on the rise and Chinese inflation just went to the highest level it has seen in a while.
  • One of the stories I’m keeping an eye on too is that long-haul trucker wages are accelerating quickly because new technology has been preventing drivers from exceeding their legal driving limits…which has the effect of restraining supply in trucking capacity.
  • …and that feeds into a lot of things. Until of course the self-driving cars or drone air force takes care of it.
  • The real question, of course, is whence inflation goes after the summer. I believe it will continue to rise as higher interest rates help to goose money velocity after a long time. But it takes time for that theme to play out.
  • time for four-pieces. Here’s Food & Energy.

  • Core goods. Consistent with our theme. it’s going higher.

  • OK, here’s where cell phone services come in: core services less rent of shelter. So the recent jump is taking us back to where we were a year ago. Real question here is whether medical rallies. Some signs in PPI it may be.

  • Rent of Shelter continues to be on our model. Some will look for a reversal in this little jump – not me.

  • Another month where one of the OER subindices will probably be the median category so my guess won’t be fabulous. It will probably either be 0.26% m/m on median (pushing y/y to 2.49%), or 0.20% (y/y to 2.44%). Either way it’s a y/y acceleration.
  • Oh, by the way…10y breakevens are unchanged on the day. This is the second month of data that was ‘on target,’ but surprised the real inflation bears. There isn’t anything really weird here or doomed to be reversed…at least, nothing large.
  • Bottom line for markets is core CPI will continue to climb; core PCE will continue to climb. For at least a few more months (and probably longer, but next 3-4 are baked into the cake). Even though this is known…I don’t know that the Fed and markets will react well to it.
  • That’s all for today, unless I think of something in 5 minutes as usually happens. Thanks for subscribing!!

As I said in the tweet series – this was at some level a ham-on-rye report, coming in right on consensus expectations. But some observers had looked for as low as 0.11% or 0.13% – some of them for the second month in a row – and those observers are either going to have to get religion or keep being wrong. There are a couple of takeaways here and one of them is that even ham-on-rye reports are going to cause y/y CPI to rise over the next four months. This is entirely predictable, as is the fact that core PCE will also be rising rapidly (and possibly more rapidly since medical care in the PCE seems to be turning up more quickly). But that doesn’t mean that the market won’t react to it.

There are all sorts of things that we do even though we know we shouldn’t. I would guess that most of us, noticing that our sports team won when we wore a particular shirt or a batter hit a home run when we pet the dog a certain way, have at some point in the past succumbed to the “well, maybe I should do it just in case” aspect of superstition. But there’s more to it than that. In the case of markets, it is well and good to say “I know this isn’t surprising to see year-on-year inflation numbers rising,” but there’s the second-level issue: “…but I don’t know that everyone else won’t be surprised or react, so maybe I should do something.”

By summertime, core CPI will have reached its highest level since the crisis. Core PCE will probably also have reached its highest level since the crisis. Median CPI has been giving us a steadier reading and so perhaps will not be at new highs, but it will be near the highest readings of the last decade. I believe that whether we think it should happen or not, the dot plots will move higher (unless growth stalls, which it may) and markets will have to deal with the notion that additional increases in inflation from there would be an unmitigated negative. So we will start to price that in.

Moreover, I am not saying that there aren’t underlying pressures that may, and indeed I think will, continue to push prices higher. In fact, I think that there is some non-zero chance of an inflationary accident. And, in the longer run, I am really, really concerned about trade. It doesn’t take a trade war to cause inflation to rise globally; it just takes a loss of momentum on the globalization front and I think we already have that. A bona fide trade war…well, it’s a really bad outcome.

I don’t think that just because China has been making concessionary noises that a trade spat with China has been averted. If I were China, then I too would have made those statements: because the last half-dozen Administrations would have been content to take that as a sign of victory, trumpet it, and move on. But the Trump Administration is different (as if you hadn’t noticed!). President Trump actually seems hell-bent on really delivering on his promises in substance, not in mere appearance. That can be good or bad, depending on whether you liked the promise! In this case, what I am saying is – the trade conflict is probably not over. Don’t make the mistake of thinking the usual political dance will play out when the newest dancer is treating it like a mosh pit.

And all of this is pointed the same direction. It’s time, if you haven’t yet done it, to get your inflation-protection house in order! (And, one more pitch: at least part of that should be to subscribe to my cheapo PremoSocial feed, to stay on top of inflation-related developments and especially the monthly CPI report! For those of you who have…I hope you feel you’re getting $10 of monthly value from it! Thanks very much for your support.)

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