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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.

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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.)

Summary of My Post-CPI Tweets (Mar 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 out from CPI. Exciting one after last month’s WTF print.
  • Last month remember core CPI was +0.349% m/m, highest m/m in 12 years. 1.846% on y/y, so almost printing 0.4% and 1.9% which would have been emotionally challenging for the markets and Fed.
  • For this month, 0.17% is rough consensus on core. For the economists. The Street is leaning short of that number. The story is that last month’s CPI was pulled higher by one-offs.
  • But some of those things they think are one-offs, like Apparel, weren’t. They were reversing previous one-offs.
  • Maybe some of them were, but I don’t see many. I think another 0.3% is unlikely but the market – both bonds and stocks – would react extremely poorly if we got it, even if it was just rounded up to 0.3%.
  • Anything 0.18% and higher will cause y/y core to tick up to 1.9%. To go to 1.7% you’d need 0.07%. So bigger risk of an uptick.
  • At some level this isn’t really a risk…it’s going to happen over next few months anyway. Mar-July 2017 was 0.9% annualized on core CPI.
  • This month we’re watching apparel of course (+1.66% m/m last month). Also used cars & trucks, which everyone thinks is going down but I think is still going up.
  • And medical care, which looks a little like it might be hooking higher but has a long way to go. Hospital services is one place we could see mean reversion. If I made point forecasts, I’d probably be roughly on consensus. But I don’t. I spend my time thinking about risks.
  • …and while some of the risks to the consensus are lower, they’re already incorporating some mean reversion. Underlying pace of inflation is ~2.4% ex- the one-offs, so 0.17% is a bit below the ‘natural’ current run rate. And as I said the Street is leaning shorter than that.
  • Anyway, we’ll find out in 10 minutes. Either way, I’m on the TD Ameritrade Network at 3:05 to talk about CPI. Also, if you missed it check out the Odd Lots podcast I’m featured on this week: http://www.podbean.com/media/share/dir-zinyp-3b109f4
  • Going into the number, 10y Treasury yields are -1bp, Breakevens +0.25bp roughly, S&P futures +4.6.
  • Well 0.18% on core m/m, and 1.857% on y/y. Those economists are goooood. But that’s above where traders were looking.
  • Last 12 months. This does make the slope look less scary.

  • Hey look! Another one-off on Apparel (tongue in cheek). +1.46% m/m. But that only pushes the y/y to 0.40%.
  • Hey look! Another one-off in used cars and trucks, +0.89% m/m. But that only pushes the y/y to -0.1%. [Editor’s Note – see below for my mea culpa. This was NSA. Seasonally-adjusted it was actually down, though I have the y/y right.]

  • But Primary Rents, which were +0.34% last month, only 0.20% this month. y/y to 3.64% from 3.73%. And OER 0.20% m/m (0.28% last m/m), and y/y falls to 3.15% from 3.20%. And those are big chunks. And those really ARE probably one-offs.
  • I am less sure that medical care is a one-off…-0.11% this month vs +0.18% last month. y/y slips to 1.76% vs 1.98%. Pharma lower (2.06% vs 2.39% y/y), and yep! Hospital Services mean-reverted. 5.01% y/y vs 6.04% y/y.
  • Also big weakness in recreation. +0.61% y/y vs +1.12% y/y. I’m going to want to drill deeper on that one.
  • Core goods rose to -0.5% y/y vs -0.7%. Core services were steady at +2.6%. That rise in core goods is largely the result of apparel of course. But the fact core goods are still in deflation tells you how widespread the goods deflation is.
  • Breakevens down slightly on this report, which seems odd to me. Stocks and bonds stronger. I don’t get the reaction…I guess investors outside of the Street were leaning towards a high miss? Always was nice as a bank trader to be wrong and still make money.
  • …and there goes Tillerson, according to WaPo. That’s probably not related to CPI.
  • FWIW, I said the y/y core CPI was 1.86%, which it was on a SA basis. But the NSA y/y was 1.847%, which is the reason the ‘official’ print didn’t go to 1.9%.
  • Finally drilling down. in Recreation…Video and Audio I guess is the culprit. 1.47% vs 2.29%. Recreation is only 5.7% of CPI, I guess that’s probably not worth obsessing over.
  • Lodging away from home, incidentally, was -1.51% vs -1.27%. prepare for more declarations of the “AirBnB effect.” Onle reason Housing rose, rather than falling on weak Rent and OER, was the jump in Household Energy.
  • Just realize I didn’t show a chart of the Hospital Services mean reversion. I did warn you.

  • Good segue. Here’s y/y for wireless telecom. Over the last 6 months, it’s actually flat. Because once you have infinity data, it’s hard to have more more quality improvement.

  • Core ex-housing is 0.92%, highest in a year, and it’s going to bounce higher next month (again, cell phones).
  • Still, core ex-shelter of 1.xx is nothing to be terrified about.
  • Here’s a long-term view of Apparel (geez, I’m jumping around a lot). The two-month jump puts us basically flat for the last five years. I didn’t think we would get a reversal of last mo’s jump, but two in a row is a bit sporty. Might get some next month.

  • I think if anyone says “used cars should reverse lower,” you can point out that NEW cars dove at an annualized 5.75% rate this month. That’s at least as likely to reverse higher as used are to reverse lower.
  • NEW vehicles are at -1.47% y/y, the lowest since 2009. That’s weird.
  • Biggest one-month jumps are in apparel, motor vehicle insurance, and leased cars and trucks. Which is interesting. Probably not worth reading into one month in automotive.
  • Early guess at Median…is 0.17%, bringing y/y to 2.41% (lower than last mo). But again there’s a caveat in that I have a regional OER as the median category, and the Cleveland Fed seasonally adjusts those separately so I may (will) be off on that. But probably not a lot.

  • You heard it here first! About three or four months ago…!
  • I think the summary of this report is that…if you thought inflation is contained, and last month was just a normal data wobble, this report doesn’t change your mind. And if you thought last month was a harbinger, this report doesn’t change your mind.
  • …and therefore, this shouldn’t change any minds at the Fed. They’re as hawkish or dovish now as they were before this report.
  • For me the picture is the same – the dramatic acceleration we are seeing and will see in the y/y numbers make for ugly optics over the next 5 months. But the underlying fact is that inflation is accelerating, but fairly slowly so far.
  • Oh, you know what…mea culpa on the used cars. I was looking at the NSA. The y/y is still higher, at -0.1% from -0.6%, but the m/m was actually down on a SA basis. My mistake.
  • OK, four-pieces charts. Food & Energy:

  • Core Goods – finally showing some reaction to the dollar’s decline? This is a key piece of the argument that inflation will head higher over the medium term…if it does, core goods can’t be stuck in deflation in nominal terms.

  • What I meant by that last remark…they can deflate RELATIVELY, but if the general level of inflation is going higher in a sustainable way, it can’t be all housing.
  • Piece 3…core services less ROS. This is going to go higher next month with cell phones. The key question is whether medical is going to mean revert. Again, an important part of the picture if core is going to go above 3% eventually.

  • Rent of Shelter. This has returned to the uptrend line and I wouldn’t expect much additional weakness. The trend here is stable to higher.

  • One final chart…the weight of categories inflating faster than 3%. The distribution is about half showing inflation >3%, and then about 10-15% of consumption is deflating. So draw whatever conclusion you want!

  • That’s all for today. Thanks for tuning in!

After last month’s crazy print, this month’s CPI was much more ham-on-rye as they say. Declines in the big housing categories and a retracement in hospital services were counterbalanced by a rise in Apparel (which could be partly reversed). Also, cars and trucks were a drag on the m/m. The strange weakness in new cars is confounding, with the weakness in the dollar especially but also the hurricane effect. It’s probably a sign of overbuilding in that industry. Well, a tariff on steel ought to help reverse those price declines…

There’s nothing here that suggests the underlying story isn’t still the same: underlying inflation is slowly, and not dramatically, increasing. As the one-offs dissipate, the y/y figures will accelerate more dramatically and indeed the comps over the next five months virtually assure we’ll see core inflation around 2.4%-2.5% by summer. But that’s where inflation already is…it’s just the optics catching up.

And, as a result, there’s nothing here that changes the trajectory of Fed policy. I suppose this data will be taken as positive by equity investors, if they are in a good mood and inclined to take no-bad-news as good news. If they’re in a bad mood, they’ll tend to take no-good-news as bad news, of course, but right now they seem to be in a good mood!

Categories: CPI, Tweet Summary

The Fed’s Accidental Preoccupation with Housing

March 5, 2018 3 comments

I have neglected to post here the links to recent TV appearances. Here’s one on TD Ameritrade network from February 12th; here’s one from Bloomberg TV on February 14th, the day of the shocking CPI.


I get asked frequently about Core PCE inflation. Because the Fed obsesses over Core PCE, as opposed to one of the many flavors of CPI (core, median, trimmed-mean, sticky-price), investors therefore obsess over it as well.

My usual response is that I don’t pay much attention to Core PCE, for several reasons. First, there are no market instruments that are remotely tied to PCE, so you can’t trade it (and, for the conspiracy-minded among you, that means there is no instrument whose market price can call shenanigans if the government figure is ‘massaged’). Second, while PCE is interesting and useful for some uses – it measures prices from a different perspective, mainly from the supplier-side of the equation so that, for example, it captures what Medicare pays for care as opposed to just what consumers pay – those aren’t my uses. Markets respond to inflation, and to perceptions of inflation, but what the government pays for healthcare isn’t something we perceive directly.

So, I care about PCE more than, say, PPI, but only just. The only reason I care about PCE is that the Fed cares about it.

Now,  PCE differs from CPI in a couple of key ways – apart from the philosophical way mentioned above, that one measures the price of things businesses sell and one measures the price of things people buy. But those key ways are mostly interesting to pointy-head economists who are interested in calculating the third decimal point. Me, I’m just trying to get “higher” or “lower” correct. (Ironically, those folks who are interested in the third decimal point are the same folks who miss the big figure in front). So they wail at the following chart (source: Bloomberg), and moan about how the Fed has been unable to get inflation higher because of this persistent shortfall of PCE compared to CPI. Try harder!

The pocket-protector set can keep their ‘formula differences.’ There’s really only one important difference that has caused the gap between PCE and CPI over the last half-dozen years: the difference in the weight allocated to housing. In the PCE, “Rental of tenant-occupied nonfarm housing” and “Imputed rental of owner-occupied nonfarm housing” add up to about 16% of the overall PCE. In the CPI, “Rent of primary residence” and “Owners’ equivalent rent of residences,” the corresponding categories, sum to about 32% of overall CPI.

Housing is both the largest weight in CPI, as well as one of the most stable parts of CPI. So, when shelter costs are running ahead of “the rest of CPI”, then Core CPI tends to be above core PCE. I’m actually soft-pedaling that. Given how shelter inflation has been relatively elevated now for some time, it is far and away the most important difference in CPI and PCE. So much so that I can create the following chart in a couple of minutes: I merely took Core CPI and backed out half of the weight of housing inflation, and compare that to Core PCE.

Remarkably, making that simple, back-of-the-envelope adjustment puts core CPI right smack on top of core PCE.

The implication is that in choosing to focus on Core PCE, rather than Core CPI[1], the Fed is saying that housing is just not as important as it seems to consumers. Although you spend about a third of your money on shelter (about 40%, after we take out food and energy), the Fed is behaving as if that inflation only matters about half that much. I don’t think the central bankers are doing this on purpose; I think they believe that the PCE is a more-pure economic statistic that perhaps gives them a better read on ‘overall’ inflation. But in this case, they’re effectively biasing their monetary policy looser for one reason: because housing costs are already going up faster than overall inflation.

Now, to me that sounds like they’re biased the wrong way. But the academics will write a paper in five or ten years and explain why that’s wrong, even though it turned out badly.


[1] Median CPI is better yet, but let’s take baby steps.

Categories: CPI, Federal Reserve

Summary of My Post-CPI Tweets (Feb 2018)

February 14, 2018 1 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.

  • Link to my appearance on TD Ameritrade Network [on Monday]:
  • It looks like I will be able to do most of my CPI tweet storm after all. I will be on Bloomberg live at 8:30ET with @adsteel and @DavidWestin, but I will be on the phone and will post my tweets immediately thereafter.
  • Going in, we’re facing roughly a 0.21-0.22% consensus on core CPI. I think to get an adverse reaction from equities you need to keep y/y from declining to 1.7%, which means you need core CPI to be near the year-ago comp, which means something that rounds to 0.3%.
  • Anything that rounds DOWN to 0.3% will be ugly. Again I’m talking core here.
  • It’s important to remember that this is the hardest remaining comp we have in CPI for a long time. In fact, Jan 2017 m/m was higher than any other core print of 2017. The next 6 months are only 1.1% annualized.
  • This is why we can talk about the ‘bad optics’. Core CPI will appear to be rapidly accelerating over the next half-year unless we get some weird one-offs like we did last year.
  • This month I will be especially focused on Used Cars and Trucks, which is subject to a change in BLS procedure this month. Big difference of opinion out there about whether it’s an add or subtract.
  • I believe it will be an add, because the price level is what BLS surveys and this has been very far below what private surveys have shown. Catching up to do unless the BLS just ignores that prices are higher than they thought.

  • But a tremendous amount of noise around any element of the data so it could be anywhere of course!
  • Have to go now and prep for Bloomberg call. Will be back several minutes after CPI for recap. Thanks for subscribing, everyone.
  • oh my…0.349% on core…1.846% y/y…and this was supposed to be the hard comp.
  • Supposedly the seasonals were going to dampen this figure. Whoops.
  • Remember this is a January number but…it’s hard to ignore. Accelerating major categories: Food/Bev, Apparel, Medical Care, Other.
  • Housing decelerated but that was mostly Lodging Away from Home, -2% for the month. AirBnB making a comeback?!? Primary Rents accelerated to 3.73% from 3.68% y/y and OER to 3.20 from 3.17%. This is on our model.
  • Here’s last 12 m/m core CPIs. Notice a trend?

  • CPI-used cars and trucks…was 0.32% m/m. Sorry, people who thought that it would be down. y/y though it’s still a drag at -0.61%. But last month that was -0.99%.
  • In Medical Care, Pharma decelerated to 2.39% vs 2.77%. But Doctor’s Services -1.51% vs -1.77% y/y last; Hospital Services 6.04% vs 5.09%.
  • That matters more than you think, because more care is being funneled through hospitals every day.
  • CPI for medical care…bottoming?

  • CPI pharma

  • Now, whilst Used cars and trucks accelerated, New Vehicles decelerated to -1.24% vs -0.53% y/y last month. And New Vehicles have almost twice the weight of used vehicles. So cars, actually, were a net drag. Just not the place that pointy-head economists said it would be.
  • I wouldn’t get too overenthused about apparel. Yes, it had a big jump. And with a weaker dollar and some protectionism I’d expect to see this going up. Just…lot of wood to chop.

  • Sorry I am jumping around a bit. Back to hospital services. Near longer-term high pace, but really need to see it break higher. This is an important part of core services.

  • Here’s CPI-Used Cars vs the Manheim survey. Rate-of-change. Looks like it’s catching up. But…

  • Here (again) is the index level (normalized) of CPI vs Manheim. This month’s move doesn’t do much. EVEN IF THE HARVEY JUMP IN MANHEIM GOES AWAY, BLS is still way below where it should be. This is a source of positive variance going forward.

  • Here is the distribution of price changes. As expected the weight in the left tail is starting to decline, which will cause core to converge with median eventually (or anyway, get close).

  • OER accelerated slightly, but as I mentioned this is what our model expects. Not to anthropomorphize a model. The real question is which of our submodels – which agree at this level but diverge – ends up being ‘correct’.

  • So here’s the ‘four pieces’ look. What it shows, frighteningly, is that nothing unusual is happening. As a reminder to people seeing this 1st time…this breakdown of CPI has four roughly-equal pieces.

  • Food and Energy

  • Now the core pieces. Core Goods. With dollar weakness this will eventually go mildly positive. But this happens with a lag and hasn’t happened yet. Maybe Apparel is first shot?

  • Core Services less Rent of Shelter. If Medical Care is bottoming, this is an upside risk. I doubt there’s much downside risk at this point.

  • And Rent of Shelter. It’s decelerated, but home prices are still rising and I don’t think this is going to drop out of the sky. Net result: hard to see where disinflation would come from.

  • This is where I usually conclude by forecasting Median CPI. But median category looks like a subcomponent of OER, which the Cleveland Fed separately computes a seasonal adj for. However, looks to me like Median won’t be anywhere close to core. Probably around 0.2%.
  • Looking forward, remember: the EASY core comps are ahead. Feb 2017 was +0.17%, March -0.07, April +0.09%, May +0.08%. June and July 0.14%. Not until Aug do we have another 0.2% comp. This means core CPI is going to be rising from the current 1.85%.
  • …and that in turn is going to scare investors, and the Fed (which usually follows the bond market) might overreact for all their brave talk currently. Today’s data certainly created a WTF moment at Constitution and 20th St. NW
  • That’s a wrap for now people. It was a fun one. Thanks for tuning in! Thanks for signing up!

The big takeaway from this month was that this was supposed to be the difficult comp for year/year CPI. With all of the sturm und drang about inflation over the last couple of weeks, this was set up to be a whipsaw when the January data turned out to show a decline in year/year core CPI. Going into the data, I would have preferred the long side of equities (for a trade) because it seemed like the talk around this CPI was overdone.

But instead we got the highest m/m core CPI in 12 years, and it was very close to printing 0.4% with rounding. That would have been heart-stopping.

The stock market seems at this hour to have fallen in love with the idea that this was all due to “weird jump in Apparel.” But Apparel is only 3% of CPI and 4% or so of Core. So a 1.5% miss in Apparel would only add 0.06% to core CPI. And core CPI missed by more than twice that. Moreover, the jump in Apparel is just reversing some curious recent weakness in the series, so arguably it’s an unwind of a one-off, not a new one-off. Year/year, Apparel is still deflating at -0.62%/year even with this month’s jump. That’s steeper deflation, actually, than the four-year average! With the dollar weakening, I would expect Apparel to be adding, not subtracting, from inflation over the balance of this year. But, with such a small weight…who cares?

I agree that one should not exaggerate the importance of any one month’s data, for any data series (including Average Hourly Earnings, which seems very likely to reverse some next month). But the next six months are going to see core inflation continue to rise, optically. If we get “only” 0.2% prints for each of the next six months, then July core CPI will be around 2.5% y/y. At that point, people will be extrapolating crazy numbers. But for now, we still have all of the ugly optics to look forward to.

This is a bad figure. There are no two ways about it.

Two Important Changes Coming to the CPI

January 30, 2018 2 comments

There are a couple of potentially important changes to the CPI that will take effect in the next few months. It is worth thinking about how these will affect the data.

  1. Sometime in “Spring 2018,” the BLS will reweight the physicians’ services index, which includes consumer out-of-pocket, Medicare Part B, and private insurance reimbursements, to better reflect the current market weights of various payer types.

This matters, because the ACA (nee Obamacare) caused a large shift in where payments were coming from, and one effect of that shift was to obfuscate actual inflation in medical care. Because CPI only includes payments that consumers make, and not the ones that government provides (Medicare Part A, Medicaid), large changes in the coverage population and the significant change in deductibles caused Medical Care inflation to do things that really didn’t make a lot of sense. We know that total spending on health care grew sharply under Obamacare as Medicare, Medicaid, private health insurance, and out-of-pocket spending all rose, but medical care inflation as measured by CPI sharply decelerated over the last 15 months. It isn’t because health care is suddenly more affordable; it’s because large change in the way medical care is paid for was bound to cause large change in the measurement of medical care. It is likely that reweighting this index to current weights will cause better stability in this measure – but at a higher level than the recent 1.7% rate. Since Medical Care is the main thing holding down core PCE, this will likely make the optics worse over the next year (and see what I have already said about the optics).

  1. With January 2018 data, CPI for used cars and trucks will change from a three-month moving average to a single-month price change. The BLS says “This modification will result in an index that reflects price change closer to the reference period.”

This matters, because as I’ve been pointing out over the last few months the CPI for used vehicles is quite a bit below where private surveys of used car prices suggest it should be. The recent rise in used car prices is happening largely because Hurricane Harvey removed hundreds of thousands of vehicles from the road, but the BLS measure has been lagging behind the private measure of these prices. This is one of those effects that is expected to make the CPI optics worse in 2018, and this change could make it worse, faster. If CPI measures of car inflation merely converge with the blue line below, it’s worth about 0.5% on core inflation. Moving to a 1-month, rather than a 3-month measure will make this more volatile, but also will make it converge more quickly. Indeed, it makes this month’s CPI report even more interesting and creates a chance for a significant surprise higher as soon as this month.

Categories: ACA, CPI, Quick One

Global Inflation: the Worm Finally Turns

January 29, 2018 6 comments

Approximately nine years ago, I founded a company specializing in developing new ways to invest in and hedge against inflation. I originally had two partners; one left after a few months and the other lasted a year before heading back to a Wall Street job. (I think leaving after 3 months of trying a startup was a little sporty, but I don’t begrudge the partner who stuck it out for a full calendar turn and then some.)

The last nine years have been a difficult time to be developing and marketing inflation expertise. While we conceived the firm as having strategic positioning on inflation protection – whether inflation is going up or down, inflation risk is always there to be managed…and we are all born inflation-exposed, and remain so unless we do something about it – I confess that I underestimated how hard of a pitch that would be to investors who haven’t seen core inflation above 3% for two decades. Unless you have a certain amount of grey hair, you think 3% is high inflation, but that’s not really high enough to damage most asset markets. So why bother?

But times, they are a changin’ back (as Bob Roberts famously sang). Average core inflation around the world is near the highest levels since the 1990s. The chart below shows the unweighted average of the US, Europe, Japan, the UK, and Chinese core inflation (using median for the US, which is a better measure). While the average of 1.7% or so is nothing to be terrified about, it also should be noted that there is nothing evident on the horizon that would tend to arrest this rising trend.

While money supply growth has been slowing gradually around the world, monetary conditions are not likely to seriously tighten until banks are no longer sitting on a mountain of excess reserves. In the meantime, higher interest rates will tend to cause money velocity to rise because velocity is the inverse of the demand for real cash balances – in English, that means that when interest rates are low, you’re happy to hold cash balances but when interest rates rise, cash becomes a hot potato to be invested, spent, or lent rather than sitting in cash. It is no coincidence that both global money velocity and global interest rates are both at or near all-time lows. However, interest rates seem to be going higher – seemingly nowhere faster than in the US, where the 5y Treasury rate has risen about 80bps in the last five months and is at 8-year highs. In turn, that means money velocity is very likely to rise, and any rise at all makes it harder to have an agreeable mix of growth and inflation.

You can subscribe to my live tweets on the monthly CPI day and see why, but not only is domestic inflation rising but the optics this year are going to be much worse for policymakers and investors focused on core inflation. In 2015-16, core inflation accelerated about ¾% to catch up with median CPI; this year the rise is going to be at least that much just from the effect of cell phones and cars. My point forecast for median CPI in 2018 – I hate point forecasts, but to illustrate that I’m mainly talking about optics in 2018 – is for an 0.25% acceleration in median CPI. But core CPI may rise a full percent because of the transitional pieces that are falling out of the y/y number. And that assumes that protectionist rumblings don’t get any louder than they currently are.

In 2015-16, breakevens actually didn’t respond much because investors didn’t believe in the underlying dynamics. They do today, as global inflation swaps (see chart below) are on the rise everywhere except in the UK, where the post-Brexit spike is fading some. Even in Japan! I don’t know where the flows will take us, but the combination of the general inflation uptrend, the optics, the flows, the fact that TIPS are still about 35bps cheap compared to nominal bonds (although down from about 100bps cheap 18 months ago), and the fact that gasoline prices are probably going to make headline inflation look even worse than core all come together to create the possibility of a pretty unfortunate spike in inflation markets. Unfortunate, that is, for owners of stocks and bonds.

Over the last nine years, I have spent a lot of time watchfully waiting, working on product development (this index launched last year by S&P, representing a tuition tracking strategy that we hope will result in new college tuition hedging products, is going to be one of our biggest successes), nurturing the slow growth of the firm, and positioning Enduring Investments to be relevant when inflation heads higher.[1] As the years have passed, I have written less frequently because there wasn’t much to say.

There is, now, starting to be more to say. Inflation is headed higher at least for now, and I am seeing more inquiry from investors curious about how to play it. You can expect to hear more from me, because what I am saying is more urgent than it was. And I’d like to hear from you, too…especially if we can help.

[1] And I should note that we are offering small interests in the firm itself to accredited investors, in a so-called 506(c) offering that is ongoing. Contact me if you are an accredited investor who wants to know more.

Categories: CPI
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