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CPI, Your Way

January 21, 2016 2 comments

For those of you on the East coast, looking for something fun to do with your weekend between shoveling turns, I thought this might be a good time to introduce our “personal CPI calculator.”

Sounds exciting, right?

It is an old idea: one of the reasons that people don’t like the Consumer Price Index is that no one is an “average” consumer. Everyone consumes more or less than the “typical” amounts; moreover, everyone notices or cares more about some costs than they do for others. It turns out that for most people, the CPI is a decent description of their consumption, at least close enough to use the CPI as a reference…but that answer varies with the person.

Moreover, CPI turns out to be a very poor measure for a corporate entity, which cares much more about some costs than others. Caterpillar cares a lot about grain prices, energy prices, and most importantly tractor prices, but they don’t care much about education. (This is one reason that corporate entities don’t issue inflation-linked bonds…it isn’t really a hedge for them. Which is why I have tried for years to get inflation subindices quoted and traded, so that issuers could issue bonds linked to their particular exposures, and investors could construct the precise exposure they wanted. But I digress.)

The BLS makes available many different subindices, and the weights used to construct the index from these subindices. Last year, the Federal Reserve Bank of Atlanta published on their macroblog an article about what they call “myCPI.” They constructed a whole mess of individualized market baskets, and if you go to the blog post they will direct you to a place you can get one of these market baskets emailed to you automatically every month. Which is pretty good, and starting to be what I think we need.

But what I wanted was something like this, which has been available from the Federal Statistical Office of Germany for years. I want to chart my own CPI, and be able to see how varying the weights of different consumption would result in different comparative inflation rates. The German FSO was very helpful and even offered their code, but in the end we re-created it ourselves but tried to preserve some of the look-and-feel of the German site (which is itself similar to the French site, and there are others, but not for US inflation).

Here is the link to Enduring’s “Personal CPI Calculator.” I think it is fairly self-explanatory and you will find it addicting to play around with the sliders and see how different weights would affect the effective price inflation you experience. You can also look at particular subindices, through the “products” button. Some of these are directly BLS series (but normalized to Jan 1999=100), and some are collections of subindices that I did to make the list manageable.

I think you’ll find it interesting. If you do, let me know!

Categories: CPI, New Products

Summary of My Post-CPI Tweets

January 20, 2016 4 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…sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to WWWM@enduringinvestments.com. You can also pre-order online.

  • So I guess the good news this morning is that the market has bigger worries than CPI. Wait, is that good news?
  • OK, remember this morning we’re dropping off some lousy numbers so core should rise to 2.1% just on base effects.
  • But Dec CPI is always weird, like many Dec numbers. It’s the only month that has a strong seasonal effect on prices (in the US).
  • Headline CPI will also rise, y/y, simply because of base effects. Don’t think the Fed didn’t know this when they tightened!
  • OK, +0.1% on core a bit weaker than expected, but y/y still rose to 2.1%. y/y headline to 0.7%, though I don’t care about headline.
  • Core month/month was 0.13% to 2 decimal places, and forecasters were really looking for 0.18%ish, so not horrible miss.
  • y/y core is 2.09% to 2 decimals. I really thought it would go to 2.2% this month, but like I said, Dec is wacky.
  • Next mo we compare to +0.18% in Jan 2015 (on core), so uptick to 2.2% will be more difficult. But core should converge with median.
  • OK, in big categories Housing and Medical care decelerated while Apparel, Transp, and Educ/communication accelerated.
  • In Medical Care (which is only 7.7% of CPI but high-angst for people), big drop in medicinal drugs to 1.66% from 2.68%.
  • That smacks of a seasonal maladjustment. But it’s only 1.7% of the basket.
  • In Housing, Primary Rents and OER both accelerated, which is what matters. Primaries 3.68% from 3.64%; OER 3.14% from 3.08%.
  • Those are the pendulous categories, between them almost half of core CPI, that matter. And they keep going up.
  • Lodging Away from Home (small category) dropped to 1.88% from 2.78% y/y. Again, smacks of bad seasonal adjustment.
  • Household Energy was also lower. So there you have it – the rent and implied rents continue to go up; the cost of piped gas e.g. not.
  • In Transp, Motor Fuel did better on base effects (only -19.5% y/y!) but insurance, repair, and new cars/trucks were all up.
  • Overall, core services remained at +2.9% y/y; core goods rose to -0.4% from -0.6%.
  • The continued rally in the dollar probably means core goods will continue to drag on overall CPI. It’s not a huge effect but it’s there.
  • Core inflation ex-housing rose, 1.28% y/y by my calculation, highest since mid-2014. Hasn’t been MUCH higher since 2012-13.
  • Sorry that’s core ex-shelter, not ex-housing.
  • So you can think of core CPI as (rents) + (core goods) + (core services ex-rents) + (food & energy). Each roughly equal weight.
  • Rents are over 3% and rising. Food & energy weak, core goods weak, core svcs ex-rents rising.
  • Rents will continue to rise. And so median CPI should also. But I am less sure than I have been that the $ will stop strengthening.
  • …and less sure that interest rates will rise, pulling up money velocity. So, I will be pulling my forecasts for 2016 lower.
  • They will still be higher than everyone on the Street, I am sure. Because they think growth matters a lot for inflation.
  • Proportion of CPI that is inflating faster than 3% is at 42.7%. So main body is still between 3%-4% with long negative tails.
  • But at least inflation hasn’t broadened FURTHER over the last few months. It’s been around 42-47% inflating over 3%.
  • ..fairly close call, looks like 0.147% on my back-of-envelope, which would make y/y median CPI drop to 2.43% from 2.46%.
  • Bottom line is that broad inflation is around 2.5%, but more than 40% of CPI is above 3% and rising.

The broad themes this month are very much in keeping with the (somewhat longer) post-CPI post I wrote last month – the analysis there is worth re-reading as several of these points keep coming up.  These broad themes are that (a) rents remain steadily accelerating, and likely will continue to do so because home prices continue to rise between 5-7% per year and rents tend to be driven largely by home prices over time. The chart below (Source: Enduring Investments) shows that the ratio of median home prices to the level of Owners’ Equivalent Rent is again rising. This means that either housing is entering into bubble-pricing territory again, or that OER is going to continue to be pulled higher for a while, or both.

ratiomedoer

Our models have OER continuing to rise to at least 3.5% (from 3.08%) although our more speculative model has it headed over 4%. Still, if that’s as bad as housing inflation gets, and the dollar continues to strengthen, then median inflation will probably not go much higher than 3% because core goods inflation will remain soft while core services inflation will eventually pause.

And the continued – and, to me, confounding – strength of the broad trade-weighted dollar is the real question. The chart below (Source: Enduring Investments) illustrates the connection between the dollar and core commodities. On the one hand, note that even large changes in the dollar have only a small effect on core goods (and on GDP), and essentially no effect outside of core commodities. And, if the dollar merely stops strengthening, then we would expect core goods prices to start rising around 0.5%-1.0%, which would add another few tenths to core CPI.

dollarvscore

But, on the other hand, note that the current weakness in core goods is consistent with the dollar’s recent pattern of strength, and some deeper analyses/regressions we look at suggest we could even get a bit more core goods weakness over the next 3-6 months. And is there any reason to expect the dollar’s strength to reverse? The dollar is the best house in a bad neighborhood, as it is said…for now. So I am no longer so confident that the greenback will start weakening soon.

Moreover, I am also less sure that interest rates are going to rise in the near term. While the Fed has begun to raise short-term interest rates, the economy is evidently weakening and the stock market isn’t doing very well recently to put it mildly. A further hike of rates this month is virtually out of the question, and further hikes this year are hardly assured. While higher inflation this year should cause nominal rates to eventually leak higher, I am not sure how soon that will happen. And if it doesn’t happen, then money velocity will probably not rise substantially. If velocity merely flatlines, then 5%-6% money supply growth with 2% GDP growth gives you 3%-4% inflation, which is still fairly perky compared with what most analysts are currently expecting but hardly alarming in the big picture.

The big picture concern – which is merely held in abeyance, since money velocity cannot stay permanently low unless interest rates also stay permanently low – is that interest rates and velocity must eventually return to some semblance of normalcy, if the economy is to be considered back in normalcy, and unless the Fed removes all of the excess reserves so that it is able to then start to shrink the money supply, rising velocity in the context of 5%-6% money supply growth produces pretty ugly inflation outcomes. (Go to our monetary inflation calculator to see what can happen with even a modest rebound in velocity.)

 

Categories: CPI, Tweet Summary

A Good Time to Remember

December 16, 2015 7 comments

Some days make me feel so old. Actually, most days make me feel old, come to think of it; but some days make me feel old and wise. Yes, that’s it.

It is a good time to remember that there are a whole lot of people in the market today, many of them managing many millions or even billions of dollars, who have never seen a tightening cycle from the Federal Reserve. The last one began in 2004.

There are many more, managing many more dollars, who have only seen that one cycle, but not two; the previous tightening cycle began in 1999.

This is more than passing relevant. The people who have seen no tightening cycle at all might be inclined to believe the hooey that tightening is bullish for stocks because it means a return to normalcy. The people who have seen only one tightening cycle saw the one that coincided with stocks’ 35% rally from 2004-2007. That latter group absolutely believes the hooey. The fact that said equity market rally began with stocks 27% below the prior all-time high, rather than 32% above it as the market currently is, may not have entered into their calculations.

On the other hand, the people who dimly recall the 1999 episode might recall that the market was fine for a little while, but it didn’t end well. And you don’t know too many dinosaurs who remember the abortive tightening in 1997 in front of the Asian Contagion and the 1994 tightening cycle that ended shortly after the Tequila crisis.

Moreover, it is a good time to remember that no one in the market today, or ever, can remember the last time the Fed tightened in an “environment of abundant liquidity,” which is what they call it when there are too many reserves to actually restrain reserves to change interest rates. That’s because it has never happened before. So if anyone tells you they know with absolute certainty what is going to happen, to stocks or bonds or the dollar or commodities or the economy or inflation or anything else – they are relying on astrology.

Many of us have opinions, and some more well-informed than others. My own opinion tends to be focused on inflationary dynamics, and I remain very confident that inflation is going to head higher not despite the Fed’s action today, but because of it. I want to keep this article short because I know you have a lot to read today, but I will show you a very important picture (source: Bloomberg) that you should remember.

coreandfedfunds

The white line is the Federal Funds target rate (although that meant less at certain times in the past, when the rate was either not targeted directly, as in the early 1980s, or the target was represented as a range of values). The yellow line is core inflation. Focus on the tightening cycles: in the early 1970s, in the late 1970s, in 1983-84, in the late 1980s, in the early 1990s, in 1999-2000, and the one beginning in 2004. In every one of those episodes, save the one in 1994, core inflation either began to rise or accelerated, after the Fed began to tighten.

The generous interpretation of this fact would be that the Fed peered into the future and divined that inflation was about to rise, and so moved in spectacularly-accurate anticipation of that fact. But we know that the Fed’s forecasting abilities are pretty poor. Even the Fed admits their forecasting abilities are pretty poor. And, as it turns out, this phenomenon has a name. Economists call it the “price puzzle.”

If you have been reading my columns, you know this is no puzzle at all for a monetarist. Inflation rises when the Fed begins to tighten because higher interest rates bring about higher monetary velocity, because velocity is the inverse of the demand for real cash balances. That is, when interest rates rise you are less likely to leave money sitting idle; therefore, investors and savers play a game of monetary ‘hot potato’ which gets more intense the higher interest rates go – and that means higher monetary velocity. This effect happens almost instantly. After a time, if the Fed has raised rates in the traditional fashion by reducing the growth rate of money and reserves, the slower monetary growth rate comes to dominate the velocity effect and inflation ebbs. But this takes time.

And, moreover, as I have pointed out before and will keep pointing out as the Fed tightens: in this case, the Fed is not doing anything to slow the growth rate of money, because to do that they would have to drain reserves and they don’t know how to do that. I expect money growth to remain at its current level, or perhaps even to rise as higher interest rates provoke more bank lending without and offsetting restraint coming from bank reserve scarcity. By moving interest rates by diktat, the Fed is increasing monetary velocity and doing nothing (at least, nothing predictable) with the growth rate of money itself. This is a bad idea.

No one knows how it will turn out, least of all the Fed. But if market multiples have anything to do with certainty and low volatility – then we might expect lower market multiples to come.

 

Summary of My Post-CPI Tweets

December 15, 2015 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…sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to WWWM@enduringinvestments.com. You can also pre-order online.

  • #CPI +0.0%/+0.2%. Y/y on headline goes to +0.5%, highest since December. Welcome to base effects!
  • Core was actually +0.18% m/m, a bit higher than expected. y/y on core goes to 2.02% from 1.91% as we dropped off a weak mo.
  • Next month, core #CPI will go to 2.1% or 2.2% y/y, simply because we drop off last December’s +0.06% aberration.
  • The rise in core seems dramatic (highest since 2012 now), but it’s just catching up with Median. Expected.

coremed

  • Primary Rents actually decelerated to 3.64% from 3.74%, and OER roughly unch at 3.08% from 3.09%. So core was held DOWN somewhat.
  • Even with that, overall Housing subindex was 2.14% y/y from 2.12% y/y. Big jump in Lodging Away from Home helped that.
  • Medical Care 2.95% from 2.98%. Boost to core came from “Other” (2.08% from 1.86%) and Education/Communication (1.32% from 0.97%).
  • Core #CPI, ex-housing, 1.18% from 1.00%. That’s the story here. Highest since mid-2014.
  • Core services 2.9%, highest since Nov 2008; core goods -0.6%, partial retrace from last month but still very weak.
  • The internals here not pleasant. We know housing will continue to accelerate. Core goods will not deflate forever.
  • Love this picture of core goods and core services. Note services is usually the stickier piece.

coregoodsserv

  • Early guess at Median CPI: 0.18%, keeping y/y at 2.47%. But median component looks like South Urban housing; hard to seasonally adj.
  • The categories that are mainly non-core: Food & Beverages 1.2% from 1.6% y/y; Transportation -6% from -7.9%.
  • Transport improvement notjust fuel (-24.2% from -27.9%), but also insurance (5.5% v 4.7%) and new/used vehicles (-0.1% v -0.4%)
  • …and airline fares (-3.8% v -5.2%), which is astonishing given the decline in jet fuel prices: down 67% v mid-2014.
  • Nothing in the #CPI today is soothing. But nothing here could change the Fed outcome tomorrow anyway.
  • FOMC has done nothing to dissuade the market from assuming a tightening. But important to remember the surprise risk is asymmetrical.
  • That is, the FOMC is much more likely to be willing to surprise the market dovishly than hawkishly. I do think they will tighten tho.
  • Last fun chart of the day. Weight of #CPI components rising faster than 3% per annum.

wgtover3

The CPI report today was mainly interesting because while core rose as expected – actually, a little bit more than expected – that was not due to primary rents and Owners’ Equivalent Rent, which have been the driving force for some time. Indeed, Primary Rents actually decelerated, so the rise in core CPI came despite sluggishness in one of the formerly-leading components.

So what happened? Well, other elements of core services took the reins. Un-sexy elements like Information and Information Processing (-0.8% from -1.5%, and compared to a 2-year compounded rate of -1.3%), Personal Care Services (3.1% vs 2.7%), Medical Care – Professional Services (2.0% vs 1.8%), and Health Insurance (3.6% vs 3.0% – see chart below, source Bloomberg).

healthins

It is worth pointing out that health insurance is only 0.75% of the CPI because the BLS measures the costs of medical provision more directly. This is a residual. But still very interesting given what we know anecdotally is happening in the ACA marketplace.

Here is the chart of core inflation, ex-shelter (Source: Enduring Investments).

corexshelt

This doesn’t look alarming, but the story of the low core inflation over the last few years can be thought of this way: shelter prices going up; core services ex-shelter decelerating somewhat; core goods deflating. We can’t count on core goods deflating forever (although our models have them deflating at roughly this pace for a little while yet), and they tend to move around more than core goods. But the core services ex-shelter piece, filled with things like medical care, has played a major role. Those pieces are now re-accelerating.

Nothing that happened today, as I note in the tweet-feed, will change what the Fed does tomorrow. While I was long skeptical that the Committee would tighten in December, the market priced it in and no Fed speaker (with any weight) tried to signal otherwise. That tacit agreement with market pricing has historically meant that the FOMC was prepared to do what the market had priced in. But there are four caveats worth noting.

First, as I said in the tweet-stream the Fed is always more likely to surprise on the dovish side than on the hawkish side. Thus, if the market was pricing in no action but the Committee wanted to tighten, they would be much more aggressive about speaking out so as not to surprise the markets. They never seem to care about surprising them in the dovish direction. So there’s that.

Second, this would be the first tightening of the Yellen regime. We don’t know that she operates in the same way that prior Fed Chairmen have operated; perhaps she is less worried (or aware) about surprising the markets. It is worth keeping in mind although I doubt very much she wants to be a rebel in this way, especially with high yield markets in what can generously be called “disarray.”

Third, whatever happens tomorrow the second tightening is very much up in the air. We are starting to see failures of high yield funds and we will see failures of high yield companies. If this gets particularly ugly, it is possible the Fed will take a pass in the first or possibly the first couple of meetings in 2016. If that happens, it will be harder to get started again. So I’d be careful to price a long string of tightening actions here.

Fourth, and finally: I have been calling it “tightening” but the Fed of course is not tightening policy. They are only raising interest rates. There will still be plenty of money in the system, and rates will be going up not because demand for money outstrips its supply, but because the Fed says so. The result of this will be very different from the results that followed prior Fed tightenings. Inflation will rise, because velocity rises when interest rates rise and that leads to higher inflation – and this generally happens when the Fed starts to tighten – but since the Fed will not be reining in money growth inflation will continue to rise. That’s unusual, but it will happen because the deviation from the script is important: ordinarily, it is the slowing of money growth rather than the increasing of interest rates that restrains inflation; the increase of interest rates actually accelerates inflation. The Fed has no plans to slow money growth, nor any way to really do it – so inflation will continue to rise.

Summary of My Post-CPI Tweets

November 17, 2015 5 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…sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to WWWM@enduringinvestments.com. You can also pre-order online.

  • +0.2% on core CPI…as expected…waiting for breakdown
  • With Median CPI running 2.5% as of last month, we should be expecting 0.2% as the “normal” core going fwd.
  • 20% was core to 2 decimal places. 1.91% y/y. [ed note: mistweeted as 0.19% first]
  • Note that the next two months, we roll off +0.08% and +0.06% from last year. This means core will be about 2.2% by dec CPI.
  • (Though there’s some evidence of missed seasonality in core CPI these days, through airfares e.g.)
  • Primary Rents 3.74% vs 3.71%. OER unch at 3.09%. So Housing roughly unch at 2.12% y/y
  • Medicinal drugs 2.95%, up a bit, but Hospital Services 4.87% vs 3.28% and Health Insurance 2.99% vs 1.74%.
  • No big surprise that there’s a jump in medical care services if you’ve looked at your bills recently! Probably not temporary.
  • core services at +2.8% mainly due to medical; core goods -0.7%, weakest since Jan.
  • Apparel -1.91% vs -1.37%, a non-negligible part of core goods.
  • New vehicles also soft: +0.14% from +0.47%. Some will say this is a VW effect, but also a general dollar effect.
  • The dollar effect, overall, is very small but in a few categories like Apparel it is large and in cars it is measurable.
  • First cut at Median, looks to me like ~0.21%, unchanged at 2.5% y/y. That’s the number that matters but not due out for hours.
  • I think I mistweeted the core to 2 decimal places…was 0.20%, not 0.19%. still 1.91% y/y, I just typoed. Why? It’s a mistwee. [ed note: har har!]
  • Summary is there’s still no sign of deflation! The pop in medical services inflation joins housing as concerns to the upside.
  • The rise in Medical care will also tend to make PCE catch back up with core, since it has 3x the weight in PCE as in CPI.
  • I don’t care about PCE, but the Fed does.

There is not a lot here to be very happy about if you want the Fed to stay on hold. The best argument for the Fed to not tighten, at this point, is that it doesn’t wanna. Growth isn’t great, and is weakening, and we may well enter a recession in a few months (we won’t know that for a year, of course, when the NABE announces it). But that won’t stop inflation from rising. Money supply growth is still rolling along at 6.7% (the highest in 15 months), but the Fed doesn’t really care about that as far as anyone can tell. At this point, the argument for the Fed to move is strong, but it has been almost this strong for a couple of years (and arguably stronger, when growth was less tenuous a year or two ago). The only argument that is stronger now is that they are even further behind the curve.

However, I am still skeptical that the Fed will tighten in December. They need to walk back their rhetoric, and I expect they will do so over the next few weeks (if they do not, then I am wrong and they will tighten in December). Even if they tighten, though, I do not expect them to tighten more than a couple of token times, before slowing growth makes them ‘pause’ – and that will be an interminable pause.

One chart here that is the most disturbing of the report: medical care services.

medsvcs

If you have been shopping for healthcare recently, you know that there are steep increases in insurance (which doesn’t show up very much in CPI but is more meaningful in PCE) and direct services that you pay prior to using up your deductible are also rising significantly. Medical care is a mess. For a while, the reorganization of payment streams hid the actual increased costs of Obamacare, but the real costs are starting to be felt. It may be that the cost curve eventually turns down because consumers have to pay for more of the care themselves. But this hasn’t happened yet, and it will take time. In the meantime, medical care services will add to housing services as the main pressures for higher prices.

It’s only softness in goods prices that is holding down overall core CPI now, and that won’t last forever!

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets

October 15, 2015 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. Plus…sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to WWWM@enduringinvestments.com. You can also pre-order online.

  • core CPI +0.21%, higher than expected. y/y core to 1.89%.
  • core services up to 2.7%; core goods remains at -0.5%
  • The rise in core CPI #inflation is no surprise to anyone watching Median. But a surprise to many apparently.
  • Owners’ Equiv (3.09% from 3.02%), Primary Rent (3.71% v 3.62%), Lodging Away from Home (1.94% v 1.69%).
  • Overall housing 2.12% vs 2.02% last month. All in keeping with established trends and unsurprising; this has further to go.
  • Medical Care approx unch (2.45% y/y); Recreation unch (0.64%); Apparel down slightly.
  • within Medical, medical drugs decelerated to 2.9% from 3.5%, but professional services and health insurance counteracted that.
  • Core #inflation ex-housing up to 1% vs 0.9%. That’s low but highest it has been since last July.
  • Worth pointing out: derivatives markets are pricing core CPI to be below 1.5%, compounded, for 8yrs. It’s above that now.
  • …and implied core for the next year is below zero (even after today’s rally so far). Core deflation is not happening.
  • US (headline) #Inflation mkt pricing: 2015 0.5%;2016 1.3%;then 1.6%, 1.7%, 1.7%, 1.8%, 2.0%, 2.1%, 2.2%, 2.3%, & 2025:2.3%.
  • So Fed, what do you believe? the market or your own lying eyes? They’re focused on headline now so their deflation worries persist.
  • This is a fun chart. Note that about half of the weight of CPI is inflating >3%. But 12% is deflating.

cpidist

  • That’s why median matters.
  • Warning: Back of the envelope on Median CPI suggests chance of +0.3%; would imply Median would go to post-crisis high near 2.5%.
  • My back-of-the-envelope lacks seasonal adjustment for regional housing indices but it has been pretty close recently.
  • Cleveland Median CPI +0.3%, +2.5% y/y. QED.
  • inflation is now officially higher than it has been since 2009, on the way down.
  • And Fed to continue to do nothing about it.
  • Median CPI thru this month. In line with what we have been forecasting. Any questions?

medagain

At 2.5%, median inflation is not only at or above the equivalent level on core PCE, given historical spreads, but also is clearly rising as the chart above shows. However, this Fed believes very strongly that inflation cannot go up if the economy is slowing, despite generations’ worth of counterevidence (the 1970s, anyone?). The economy does seem to be slowing, not just domestically but globally. Therefore, whether the Fed thinks Median CPI is relevant or not, they will continue to focus on headline inflation numbers that flirt with deflation because of the drastic decline in energy quotes. If they talk about the central tendency of inflation, they will talk about core PCE (and ignore the question of whether the slowdown in medical care which shows up there is illusory or transitory). If pressed, they may mention core CPI, which is still below target because of the “tail” categories.

You will not hear them talk about Median CPI at 2.5% and rising.

Inflation is headed higher. How much higher, and how quickly, depends on several factors such as how quickly the Fed raises rates (I have already said this is unlikely, but note that I think raising rates would initially accelerate inflation) and whether bank lending slows for reasons unrelated to monetary policy. But the sign is clear. Inflation is headed higher.

Summary of My Post-CPI Tweets

September 16, 2015 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. And sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All – and How to Invest with it in Mind, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to WWWM@enduringinvestments.com.

Also note that I have been invited to be a guest on “What’d You Miss?” today at 4pm ET. Catch it!

  • Core CPI +0.1%, but y/y stays at +1.8% as it was a “soft” 0.1%. Specifically 0.07%, weaker than expected.
  • Core services remains +2.6%; core goods -0.5% y/y.
  • The -0.5% drag in core goods remains about what we can expect from the dollar’s current strength.
  • But remember core goods is the smaller part of core inflation (and the more volatile part).
  • Bottom line on Fed has been: plenty of argument either way. This number doesn’t affect the argument either way. Doves will be doves.
  • No idea if Fed hikes tomorrow, but SHOULD have removed extraordinary accommodation when extraordinary risks were past. Years ago.
  • Speaking of housing: Primary rents 3.62% from 3.56%; OER at 3.02% from 3.00%. This acceleration will continue.
  • Lodging away from home is a small piece (0.8% of total CPI) but always fascinates me. 1.7% y/y versus 5.7% six months ago.
  • Medical care was unch, 2.47% vs 2.49%, but pharmaceuticals was 3.5% vs 3.2% while professional services 1.7% vs 2.1%.
  • The weakness in medical care continues to be the main story holding down core vs median, since 2013.
  • Motor fuel of course a big drag on headline, but New and used motor vehicles also still weak (a dollar effect): -0.1% vs +0.2%.
  • I actually think Median stands a decent chance of an 0.2% month, based on my back-of-the-envelope calculation.
  • If I am right, then Median may be at the highest level since the crisis ended. Currently 2.28%; 2012 high was 2.38%.
  • We won’t know for a few hours and my calculator doesn’t seasonally adjust the regional housing indexes so don’t take that to the bank.
  • But even if median just stays at 2.3%, that’s consistent with PCE inflation being at the Fed’s target.
  • Really looking forward to this: On Bloomberg TV at 4pm ET with Joe and Alix.
  • Good time to mention my book “What’s Wrong with Money: The Biggest Bubble of All” due out in Feb. Can preorder: http://amzn.to/1YbJT0p
  • We don’t even have cover art yet! But the manuscript is done.
  • Much more interesting discussion [than OER] is medical care. MUCH harder to measure than OER, because consumers don’t pay for it directly.
  • We all know insurance costs are going up, but part of this is a price effect and part is a utilization effect.
  • Part of the effect of the ACA is to get people to consume less health care by making them pay for smaller costs directly.
  • …of course, that lessens overall welfare since your tradeoffs are worse. But I don’t want to get too ‘inside baseball’ in 140 char.
  • BTW, it occurs to me I never mentioned y/y core CPI is 1.83% from 1.80%, so it rose a smidge even though a weak core #.

There wasn’t a lot that was new or different in this figure. Housing continues to be the main strain on consumer budgets, as housing costs continue to rise and, given the rise in housing prices generally, this ought to continue. On the other hand, the main drag to core continues to be in the core goods component, and this ought to continue for a while. However, I don’t believe it will intensify, so for a while core (and more importantly, median) inflation will just creep up gradually. At some point, core goods will revert higher, and at that point core inflation will move with more alacrity. The timing on this appears somewhat far off, however.

That said, two other points need to be made today.

The first point is that the Federal Reserve will either raise rates tomorrow, or they will not, and this number has virtually no bearing on that. This Fed does not care very much about inflation, which is why they focus on a number (core PCE) which is not only the softest of the available series but also currently is very clearly too low based on a number of temporary effects. Core PCE has a lot to recommend it theoretically. But myopic focus on it (and any discussion at all of headline inflation, which is near zero only because of the oil price crash) can only mean that Federal Reserve policymakers are biased to be doves. But we already knew that. Moreover, if the Fed raises rates tomorrow and does it without removing the quantities of excess reserves in the system, they really aren’t doing much. At least, not much that is helpful.

The second point is that the inflation market continues to price dramatically different inflation over the next few years than we are likely to get. Either energy prices are going to continue to crash – in which case buoyant core inflation will still result in low headline inflation, which is what trades in the market – or they are going to stop crashing, in which case inflation expectations are far too low. There is virtually no chance that core inflation declines any time soon. I can make a case that core will only converge to near median, and then go flat, but unless housing collapses suddenly and unexpectedly core inflation is not going lower. (Of course, one-off effects like the medical care effect can still pervert the core numbers from time to time, which is why I focus on median, but this is inherently difficult to forecast and the one-off effects of course might also be in the upward direction).

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