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Summary of My Post-CPI Tweets (Oct 2017)

October 13, 2017 Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guyPV 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 or get it a little cheaper on our site here.

  • Friday the 13th and a heavy data day. What could go wrong?
  • 10y breakevens at local highs of 1.90% – but that’s the biggest spread over core CPI in several years.
  • …yet we still have 10y TIPS 50bps to fair at this level of interest rates.
  • Economist expectations are for 0.21% on core and 1.78% y/y. Interesting given how low it has been recently.
  • I don’t usually look at headline but the y/y number is forecast to jump to 2.3% from 1.9%. That will get some attention.
  • I think the market forecasts are about right for core, but there’s a wide range of upside risks. Autos are due to catch up, e.g.
  • But that’s why the forecasts make sense. 0.15% for trend plus 0.05% for expected value of risks.
  • …in turn, that means the point forecasts are not the most likely prints. They’re in between the most likely prints.
  • Core +0.13%, 1.69% y/y.
  • Breakdown will be interesting. Housing broad category went to 2.79% y/y from 2.91%. Medical Care fell to 1.56% from 1.81%.
  • Used cars/trucks went to -3.7% vs -3.8% y/y, so that rebound is still ahead of us. Surveys of car prices are up a lot, just not in BLS yet.
  • pulling in the breakdown now…core services 2.6% from 2.5%, but core goods deflation deepens to -1.0% from -0.9%.
  • Core goods deflation, however, ought soon to be rising again after the lagged effect of the dollar’s decline passes in.
  • In Housing, Primary Rents plunged to 3.78% from 3.88%. That’s huge. OER dropped to 3.18% from 3.27%. Also huge. There’s your story.
  • Core ex-housing rose to 0.58% vs 0.52% y/y, so there’s more going on here but the housing. Wow.
  • A few months ago we had y/y OER fall by more, but that was when OER was overextended.
  • Here is primary rents y/y. I guess this isn’t DRAMATIC – just quite contrary to my own expectations for a continuation of the rebound.

  • In Medical Care, Medicinal Drugs fell to 1.01% from 2.51%. Wow! But Professional Services and Hospital Services accelerated slightly.
  • Here’s CPI for pharma. Think we’ve discussed this before – likely compositional in nature, more generics thanks to worse insurance.

  • Professional services (doctors) bounced;not significant. Also somewhat compositional as old doctors quit rather than take ins. headaches.

  • College Tuition 2.08% vs 1.89%. Have I mentioned the new S&P Target Tuition Inflation Index recently? 🙂
  • Just b/c …who can get enough of wireless telecom services? Bounced, mostly base effect of course. Bottom line was that dip was a 1-off.

  • New cars also still deflating, BTW. -1.0% vs -0.68%. Obviously this will change with Houston buying loads of new cars.
  • Speaking of Houston: core CPI in Houston y/y ended June: 1.31%. For y/y ended Aug: 1.90%. But that’s actually before Harvey.
  • In Miami, 2.01% vs. 2.26% (June vs August). Have to wait a bit to get October numbers – they’ll come out in Dec.
  • Bottom line on the storms is that we haven’t seen the impact yet on CPI. Still to come.
  • My early estimate of Median CPI is 0.20%, bringing y/y up to 2.17% from 2.15%.
  • Housing and Medical Care still keeping pressure on core.

  • Interestingly, these other categories, including Food, and Energy too, all saw acceleration this month (except for other).

  • distribution of changes getting more spread out…

  • Percentage of basket over 3% hasn’t changed much, ergo median didn’t change much.

  • Does this change the Fed’s calculus? I don’t think so, especially with wages accelerating. Still waiting for one-offs to unwind.
  • The doves will argue that the unwind of a one-off is itself a one-off and we should therefore look thru and see 0.12-0.14 as the trend.
  • They’re unlikely to carry the day in Dec, even if the data don’t bounce higher. But if core stays weak the mkt will unwind the 3 in 2018.
  • 10y breakevens -3bps since the number. Market had seemed a little long but this is still too low for breakevens.
  • Four pieces. Piece 1: Food & Energy

  • Piece 2: core goods. Won’t go down forever with the dollar well off its highs.

  • Core services less ROS. A bounce. Sustainable? We’ll have to see.

  • Piece 4, Rent of Shelter. Seemingly ignoring continued rise in home prices. Back to model but weaker than I expected.

  • Last chart. here is the argument: do we cheer the weak consumer inflation or worry about higher wages?

  • Yes, wages follow inflation rather than lead…but the Fed doesn’t believe that.

Thanks to everyone who followed my new “premium” (but cheap) channel. I wrote on Wednesday about the reason for changing my Tweet storm; in a nutshell, it’s because research is starting to be priced a la carte at the major dealers and hopefully this means that quality but off-Street analysis might finally be competing on an even footing rather than competing with “free.” If you think there’s value in what I do, I’d appreciate a follow. If not…well, if the market tells me that what I’m producing isn’t worth anything, then I’ll stop producing it of course!

But in the meantime, here is the story of CPI this month. A continuing regression of rents and OER to model levels held core down to recent-trend levels. But there are many one-off and temporary effects that are due to be reversed, and relationships that suggest certain components are due to catch up to underlying realities. For example, here is the picture of Used Cars and Trucks CPI, compared to the Manheim Used Vehicle Value Index 4 months prior.

According to the relationship between these series over the last decade, CPI for Used Cars and Trucks should be growing about 5% faster than it is presently, and rise another 3-4% in the next few months. New and Used Motor Vehicles inflation is about 8% of core CPI, so this effect alone could add 0.7% to core CPI! Or, put another way, right now core CPI is about 0.4% lower than it would be if the CPI was measuring the actual price of vehicles the same way that Manheim does it. That’s a big number when the entire core CPI is only 1.7%.

The continued, and actually extended weakness in core goods is also due to reverse. I don’t mean that core goods inflation will go from -1% to +3% but only to 0.5%. But that 150bp acceleration, in one-quarter of the core CPI, would also raise core CPI by 40bps or so. To be sure, there is some double-counting since a third of core commodities is new and used vehicles, but that merely reinforces the message.

So, too, are the effects in medical. Volatility in those series should persist, which means that since they are at a low ebb there’s a better bet that the next volatile swing is to higher prices.

All of which is to say that the hawks on the Federal Reserve Board actually have it right, in a sense. Prices are headed higher, and inflation is accelerating. It would be a truly shocking development if core inflation one year from now was unchanged from the current level. Indeed, I think there is a better chance that core inflation is above 2.7% than below 1.7%. On another level, the hawks aren’t quite right though. By hiking rates before draining excess reserves, the Fed risks kicking off the vicious cycle I have mentioned before: higher rates cause higher money velocity, which causes higher inflation, which causes higher rates etc. Without control of reserves at the margin, the Fed cannot control money supply growth and so the normal offset to rising monetary velocity in a tightening cycle, slowing money growth, comes down to chance. Either way, the Fed is very likely to tighten in December, but beyond that it probably matters more who ends up in the Chairman’s seat than anything economic data.

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The Mystery of Why There’s A Mystery

October 10, 2017 Leave a comment

We have an interesting week ahead, at least for an inflation guy.

Of course, the CPI statistics (released this Friday) are always interesting but with all of the chatter about the “mystery” of inflation, it should draw more than the usual level of attention. That’s especially true since the mystery will cease to be a mystery fairly soon as even flawed indicators of inflation’s central tendency, such as the core CPI, turn back higher. This is not particularly good news for many pundits, who have declared the mystery to be solved with some explanation that implies inflation will stay low.

  • “Amazon effect”
  • Globalization
  • “competition”
  • Etc

The first of these I have addressed previously back in June (“The Internet Has Not Killed, and Will Not Kill, Inflation”). The second is a real effect, but it is a real effect whose effect peaked in the early 1990s and has been waning since then. I wrote something in our quarterly in Q4 last year, which is partly summarized here.

The “competition” objection is a weird one. It seems to posit that competition was pretty lame until recently, which is pretty strange. One argument along these lines is in this article by Steve Wunsch, who considers the increase in airline fees “stark evidence of a deflationary spiral in those ticket prices caused by antitrust-induced competition.” This is odd, since airlines were deregulated in 1978 and have in recent years become less competitive if anything with the mergers of Delta/Northwest in 2009, United/Continental in 2010, Southwest/AirTran in 2011, and US Airways/American Airlines in 2013. A flaccid antitrust response from the Justice Department has allowed quasi-monopolies to develop in some travel hubs, which has tended to push fares higher rather than lower. The chart below shows the relationship between Jet Fuel prices and the CPI for airfares (both seasonally adjusted) for the 20 years ended in 2014, along with the most-recent point from last month.

The highly-explanatory R-squared of 0.81 suggests that there is not much wiggle room in airline pricing. Airfares are, as you would expect under a competitive industry, roughly cost-plus with the main source of variance being jet fuel prices. This is true even though we would expect that spread to vary over time. As Mr. Wunsch would argue, the highly competitive nature of the industry is holding down the non-commodity price pressures in airfares.

The only problem is that if you extend this graph to include the last three years, the R-squared drops about 10 points:

In case it isn’t clear from that chart, the last three years have seen airfares increasingly above what we would expect from the level of jet fuel prices. The next chart makes that clear I hope by plotting the residual (and 12-month moving average to smooth out seasonal issues such as one that evidently happened last month) between the actual CPI-airfare and the level that would be predicted from the 1994-2014 relationship. As you can see, prices have been higher, and increasingly so, than we would have thought, until this last month or two – and I wouldn’t grab a lot of comfort from that yet.

Not only is this not “stark evidence of a deflationary spiral in those ticket prices caused by antitrust-induced competition,” it seems to be stark evidence of inflation in ticket prices caused by a reduction in competition thanks to airline mergers.

In reading these many articles, it always is somewhat striking to me: everybody thinks their answer is “the” answer to the mystery. But most of these authors really don’t sufficiently understand how inflation works, and what the data is showing. This is apparent to those who do understand these nuances, as an author might discuss (as the one mentioned above did) an “aberration” in cell phone inflation as if the experts are stupid for expecting inflation when cell phone services only go down. The author clearly misunderstands what the “aberration” referred to even is; in this case the aberration was an enormous one-month collapse in prices that had never been seen and has not been repeated since. (For those who are curious about the aberration, and why it occurred, and why it is likely a methodology issue rather than sign of spiraling deflation in wireless services you can see my discussion of it here.)

The mystery is simple – the Fed’s models don’t work, and don’t take into account the fact that lower interest rates cause lower money velocity. They rely on a Phillips Curve effect that they think is broken because they don’t understand that the Phillips Curve relates wages and unemployment, not consumer prices and unemployment. They focus on a flawed measure like PCE rather than on something like Median CPI which, coincidentally, is a lot higher and suggests more price pressures. The mystery isn’t why inflation isn’t rising yet – the mystery is why they think there’s a mystery.

Summary of My Post-CPI Tweets (Sep 2017)

September 14, 2017 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 or get it a little cheaper on our site here.

  • 15 minutes to go to CPI. Consensus on core is for 0.17% or so. But due to tough year-ago comparison, y/y should drop to 1.6%
  • Hurricane effects may boost headline a bit, though most of that will be later. Shouldn’t see core effects yet.
  • Core effects may potentially be seen (eventually) in shelter and vehicles; both were destroyed in large amounts in Harvey/Irma
  • well well well. Core +0.249%, ALMOST 0.3% rounded. y/y to 1.69%
  • Turnabout is fair play. Highest core CPI in 8 months, and haven’t seen hurricane effect yet.

  • Note the easy comparisons from year ago for the next couple of months, too. Might just have seen the lows in core.
  • housing up, medical care down again. Drilling down now…
  • core services was up to 2.5% from 2.4%…core goods down to -0.9% from -0.6%! With dollar weakening that’s going to change.
  • Housing 2.91% from 2.83% y/y. Primary rents 3.88% from 3.81%; OER 3.27% vs 3.21%.
  • Lodging Away from Home +0.23% vs -2.36% y/y. That was one of those one-offs. Poof.
  • Motor vehicles -1.57% vs -1.72%. No hurricane effect yet but as I said on Bloomberg today…that’s likely to be a big + going forward
  • 81% vs 2.58% last month on Medical Care as a whole. Medicinal Drugs: 2.51% v 3.84%. Hospitals 4.09% v 5.31%. Insurance 0.17% v 1.24%
  • Professional services (medical) unch at just +0.2% y/y.
  • Figure out whether this medical care pricing collapse is temporary or real and you have the big story.
  • medicinal drugs:

  • Housing and medical care. I think the Medical Care move is mostly a composition change, catching more self-pay from insurance-pay.

  • Does this change anything for the Fed? Not with the hurricanes. Expect movement to reduce balance sheet, while holding rates down.
  • Enough for today. Will put up my summary article later. If you want the chartbook go to https://store.enduringip.com
  • [later:] Median CPI was 0.247%, y/y at 2.15% up from 2.13%, basically stable since June between 2.13% and 2.18%.

This was a shorter string of tweets than I usually produce. Part of the reason for that was that I was in a car careening down the highway returning from my appearance on Bloomberg TV to talk about the Phillips curve and auto inflation, and partly it was because this one was pretty easy.

Lodging Away from Home jumped. But it had previously plunged inexplicably, so this is just a reversal. I didn’t tweet about that one, but it is symptomatic – there are a number of one-offs, and some of them are going to reverse.

Rents rose a bit, but again that is partly just a retracement of the recent slide. As I pointed out last month, that slide merely put rents back on the model where they had been running ahead of the model, so this isn’t terribly surprising.

The really surprising part was and is the Medical Care part. All subcomponents of that index are now decelerating, although pharmaceuticals are doing so in a slightly less-dramatic fashion than medical professional services. This is very outside of anyone’s forecast ranges. It is possible this is just payback for the rises the previous year, but if that’s the case then it’s not going to continue. Is it possible that we suddenly have reined in the price of medical care by making it hard to acquire? I suppose that’s possible, but I would think the better bet is that the composition of services is changing as people are paying for more out of pocket – so we buy the band-aid rather than the tourniquet, and that looks like lower prices. It is, however, really hard to tell at this point and that’s the main remaining conundrum.

I said up top that the important hurricane effects, notably in Motor Vehicles but also in Shelter, have not been felt yet. (Read more about these upcoming effects in my column “Some Effects on Inflation from Harvey and Irma”). Moreover, the next few months will see core CPI comparisons of 0.12%, 0.15%, and 0.18% from last year. Accordingly, I think core which is currently at 1.69% will be at 1.77% next month, 1.82% the following month, and 1.84% the month after that. Importantly, none of that is enough to scare the Fed into hiking again, and with the hurricane damage I think they’ll eschew further rate hikes for a while. However, they will probably start reducing the balance sheet, and if they can manage to sustain that – reverse QE, but holding policy rates down – then they will have lucked into the “right” policy that could keep inflation’s peak in the 3%-4% range rather than the 5%+ trajectory that many of their other paths have. I am skeptical they will stay the course, because reverse QE will have bad effects on asset prices. But it’s a start.

Categories: CPI, Tweet Summary

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

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.

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