Archive for the ‘CPI’ Category

Summary of My Post-CPI Tweets (April 2021)

April 13, 2021 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, issuers and risk managers with interests in this area be sure to stop by Enduring Investments!

  • Good Morning #CPI observers! Prepare for what is potentially the most entertaining #inflation figure in a while.
  • Before I get started, let me first note that I’ll be a guest on ( with @OJRenick at around 10:20ET this morning. Tune in!
  • Today’s walk-up is a little different. I usually try and focus mostly on the y/y numbers because the m/m numbers are an accumulation of random distributions around 280 other numbers. That is a lot of noise compared to signal and so I don’t like to forecast monthlies.
  • However, on a y/y basis the noise tends to cancel so it’s a clearer reading. Median CPI is even better because it lessens the impact of the tails.
  • This month, however, and for the next few months the y/y number is a distraction. We KNOW it’s going to jump a lot because the comparisons to March, April, and May 2020 are super easy. So instead, we want to focus on what happens to the monthlies.
  • I warned about this back in February in “The Risk of Confusing Inflation Frames.” And now…here we are.
  • So looking back at the last couple of months, we see that the core CPI figures were soft. Last month, core CPI (but not median CPI!) was soft because of surprising movements in goods, outside of housing. It had been goods pressing core inflation higher so that was surprising.
  • Turns out that some of that was (probably) due to the fact that the weather prevented the BLS from surveying certain prices. So we’d expect a little catch-up from last month’s +0.10% core, just as a null hypothesis.
  • Some of the places we are pretty sure to see strength are in autos, apparel, and the travel categories. Used car prices are nuts. But in the bigger picture, there are a lot of shortages out there and they all push prices the same way.
  • I talked about some of those shortages in my article at the end of March. How Many ‘Shortage’ Anecdotes Equal Data?
  • There are shortages in autos (due to semiconductors as well as lower fleet sales into the used car channel), packaging, cotton, containers, rental cars, Uber drivers, other goods…and shelter.
  • In shelter, rents have been artificially soft because of the eviction moratorium, which has made realized rents decelerate while asking rents are rising rapidly with home prices. That divergence is unusual and it’s due to the eviction moratorium.
  • The Biden Administration just extended that moratorium (was due to expire end of March) so that catch-up will come later. However there are SOME signs that rents are improving anyway. I’ll be looking for that. Rents were not as soft last month as they had been recently.
  • The economist consensus is for a core CPI m/m of about 0.2%. That seems low to me with all of the potential upside disturbances, and has got to mean that economists are expecting further shelter weakness. I don’t.
  • The market doesn’t either. Interbank trading of the (headline) price number implies about 0.1% higher than the economists expect. Most of that in core presumably. I would not be surprised in the slightest at +0.3% core.
  • We will see. Remember, the Fed doesn’t really care – and they’re working hard to tell you that you shouldn’t either. Eventually, the market will win. But not for a while. It will be late 2021 before the dust clears on the base effects.
  • So keep an eye on those underlying pressures and don’t get distracted by the y/y fog of war. I will talk today in terms of y/y figures, out of habit, but rest assured I’m watching the small ball too.
  • Thanks for coming along today on this crazy ride. Good luck! 6 minutes to print.
  • OK, core came in at 0.34% m/m, so quite a bit higher than estimates. y/y rose to 1.646%…so ALMOST rounded to a 2-tenth miss on the y/y figure.
  • Note in that chart, they’re not y/y. There’s no base effects there. In fairness, we probably should combine the last two figures, and get something like 0.22% per month, but that’s still faster than the Fed would like. Except they don’t care.
  • So Core Goods jumped back up to 1.70% y/y, where it had been 2 months ago before dropping to 1.3% y/y last month. Collection issues. Core Services up to 1.6%.
  • Primary rents +0.15%; OER +0.23%. Not as soft as a couple of months ago, but not overly strong either. Lodging Away from Home was +3.84% m/m, which pushed the Housing category to a +0.34% m/m rise…same as core, weirdly.
  • Apparel fell again. That’s a bit odd. Apparel had been doing well partly because cotton imports from part of China were being held up at the ports…maybe that’s lessening now. Anyway Apparel isn’t a big piece.
  • Pharmaceuticals: +0.08%. Doctors’ Services: +0.28%. Hospital Services +0.63%. First time I can remember them all three being positive in a while! Softness in Pharma is still surprising to me.
  • Doctors’ Services highest in years (y/y).
  • Hospital Services, despite this month’s jump…not so much.
  • Back to used cars. Part of what is happening here is that rental fleets shrunk last year so they are providing fewer cars to the used car markets. Part is the semiconductor shortage making new cars expensive. But Black Book says…this has a lot further to go in months ahead.
  • Ah. Core CPI ex Shelter jumped up to 1.61% y/y. Yeah, I know I said y/y. But that was at 1.7% last February BEFORE the COVID slide. Arguably it means price pressures are higher now than before COVID, and CPI is being held down by rents.
  • This isn’t from the CPI report but a reminder of what is happening in rents. If a landlord is unsure of being able to collect the rent, it goes in a zero. Doesn’t take many zeroes to lower measured rent. And the number of zeroes is higher when the gov’t says you can’t evict.
  • Other COVID categories: Airfares +0.44% m/m (fell 5% last month!), Lodging away from home I already mentioned +3.8% (-2.3% last month). Motor Vehicle Insurance +0.85% m/m.
  • New Cars, interestingly, was flat. That’s odd – there’s clearly a shortage of semiconductors so maybe this is more a situation of you can’t get ’em so the price doesn’t change? I’d expect that to rise going forward.
  • Car and truck RENTAL: +13.4% (SA) m/m. Here’s the m/m and y/y, which is now up to +31%. If you can’t buy ’em, you can try to rent ’em. Remember how I said fleets are smaller?
  • Now, Median CPI giveth and Median CPI taketh away. Hard to tell because median category will probably be a regional OER, but m/m will be probably 0.2-0.22%. Median y/y won’t change much b/c base effects were mainly from a few small categories with large moves.
  • That warrants further comment: the fact that we didn’t see a GENERAL deceleration in prices, but a very focused one, should make you wonder about output gap models. Most of the economy wasn’t in deflation. Hotels and airfares were though!
  • Only two core categories with more than a 10% annualized decline this month: Women & Girls’ Apparel (-28%), and Infants’ and Toddlers’ Apparel (-22%).
  • On the gainer side, tho: Car/Truck Rental as noted, Jewelry/Watches (+80.7% ann’lz), Lodging AFH (57%), Motor Vehicle Insurance (+47%), Men’s/Boys Apparel (+35%…hey!!), Misc Personal Svcs (+16%), Motor Vehicle Maintenance & Repair (+12%).
  • Core goods & Core services. Both rose, and remain atop one another. How long can goods stay elevated? Port traffic is improving, slowly. But materials prices remain stubbornly high and global trade remains fractious.
  • ok, gotta wrap it up and get to makeup for my appearance on @TDANetwork at 10:20. KIDDING, no makeup. You can dress a monkey in silk but it’s still a monkey. Anyway, I’ll do the four-pieces and then conclude. Will put out the diffusion indices later.
  • Piece 1: Food & Energy. No surprises here: it was expected to jump as gasoline prices continue to recover.
  • Piece 2: Core Goods. Back to the highs.
  • Core services less Rent of Shelter. This still remains bizarre to me. But medical finally showed some life this month and there’s sign of pressures in the PPI there so maybe it’s coming. Hard to see an uptrend here though unless you turn it upside-down.
  • Finally, Rent of Shelter. It seems it may be done going down, and there’s a lot of catch-up to do when the moratorium ends. But the last 2 months of rents have been more normal.
  • So at this hour, 10-year breakevens are +1bp and stocks are flat. Because the Fed doesn’t care, and the punch bowl remains. I guess that’s about the summary here. The base effects are going to obfuscate whatever is really happening underneath.
  • BUT, what is happening underneath (per the chart of core-ex-shelter) appears to be price pressures that are certainly no smaller than pre-COVID. Are they temporary? How will we know? If the Fed says they are, and are wrong…bad.
  • If the Fed says the pressures are NOT transitory, and are wrong, and over-tighten, that’s also bad – but for employment. And here’s the thing, this Fed has said repeatedly that full Employment is their main goal. So errors are designed into the system to be inflation-enhancing.

Here’s the summary of the main points today. Ex-housing core inflation is back at the level it was prior to COVID. Housing is artificially depressed because of the way the BLS accounts for rents (which is reasonable, since someone who isn’t paying has certainly decreased his cost of living), and asking rents tell a totally different story. But since measured rents are soft, it means that core isn’t low right now because of COVID categories: it’s low right now because of one thing, really, and that’s rents. If realized rents converge upward to asking rents, you can tack another 0.7%, 0.8%, 0.9% or so onto core CPI.

Inflation is already higher than it “should” be coming off the greatest global economic contraction since the Black Death. And that’s without consumers being truly unleashed. But the Fed has adopted an asymmetric policy stance, because they very publicly feel that the risk of higher inflation is something they ‘have the tools to manage’, whereas they believe they have some sort of moral obligation to make sure everyone is employed. I don’t want to draw too many parallels to prior hyperinflations because that’s not what I’m looking for, but the current asymmetric stance is very odd for any policymaker who learned history and knows that one of the reasons that Weimar Germany printed so many marks was because they believed having everyone employed and paid was absolutely crucial, and so they ran massive deficits and printed money to pay for them.

This is why the Bundesbank has always been willing, ever since, to rein in inflation even if it meant short-term pain in labor markets. They remember that the best route to maximum employment in the long run is to maintain a stable pricing environment. As recently as the 1990s, the Fed (Greenspan at the time) would regularly say that. It is no longer the core belief of the FRB.

The Fed believes they have the tools to rein in inflation, the knowledge about how to calibrate them, and the will to use them, but at least for the next 6 months they will wave their hands vaguely at ‘base effects.’ After that, if inflation is higher than they would like once the base effects are past, they’ll vaguely wave their hands and say ‘average inflation targeting.’ It it going to be a very long time before central bankers willingly hike rates without the market forcing them to do it. And before that, there may very well be a showdown where the Fed decides to defend the longer-term yield environment and implements Yield Curve Control. These actions and possible actions have very different implications for stocks and bonds depending on the path, especially with equities pricing in a goldilocks environment. Get ready for a bumpy year.

How Many ‘Shortage’ Anecdotes Equal Data?

March 30, 2021 5 comments

There is a growing list of categories of prices which are seeing abnormal price pressures. At least, they are abnormal by the standards of the last quarter-century! A couple of months ago, in “The Risk of Confusing Inflation Frames,” I wrote about some of the effects we might soon be seeing, and of the risk that some of the known-but-temporary effects will obfuscate more serious underlying issues.

In April, we will get the CPI for March; this will be the first CPI release to have ridiculously easy comparisons against the year-ago month. March 2020 was -0.2% on core CPI, and I suspect the consensus estimate for March 2021 will be something like +0.2%; this implies the y/y core inflation number will jump from 1.3% to around 1.7%, depending on rounding. But as I said, that disguises some of the important underlying pressures that may also start to appear with this number. There is an old saying that the plural of “anecdote” isn’t “data,” but eventually there must be a crossover point where the preponderance of independent anecdotes begins to approach the informational value of data, right? Well, here is a short list of some recent anecdotes and reports of shortages.

There has become an acute shortage of semiconductor chips, which has impacted automobile production (and will that increase prices for what is available?). There is a shortage of shipping containers, causing widespread increases in freight costs affecting a wide variety of goods. Packaging materials, which are also a part of the price of a great many goods, are also shooting higher in price. Worker shortages at various skill levels were reported in the most-recent Beige Book. There is a shortage of Uber and Lyft drivers.

There are other effects that have shown up but I misapprehended the significance of them at the time. Apparel prices have risen at an annualized 9% pace over the last four months. I’d attributed that to shipping, but there is more to it than that. In January US Customs issued a Withhold/Release Order (WRO) on cotton and tomato products coming from the Xinjiang region of China, where forced labor is employed; the order calls for the stoppage of freight with any amount of cotton (or tomatoes, but there is not much tomato in apparel) that originates from that region – even if it is only the thread on the hem. While this and the other effects on apparel are probably temporary, we don’t really know how temporary.

Importantly, we should add to these shortages a growing shortage of housing. The inventory of homes available for sale just hit an all-time low (the National Association of Realtors started keeping track in 1982).

And, as a result, the increase in the median sales price of existing homes just reached an all-time high spread over core CPI (home price increases sometimes have been higher, though it is unusual. For example, in May 1979 the year-over-year increase in the median home price was 16.9%. But core inflation was 9.4% at the time, so the real increase in home prices was only 7.5%).

I have written elsewhere about the fact that there is large divergence right now between what the BLS indicates the effective inflation in the cost of housing is, and what a measurement of asking rents suggest it should be. The significant chart is reproduced below – and the short story is that the divergence dates to the imposition of the COVID-related eviction moratorium. This has decreased the amount of rent that landlords actually expect to receive on average, which lowers effective rents even though every other measure of the true (free market) cost of shelter would be, is ratcheting higher at rates seldom if ever seen before.

Now, this moratorium was due to expire at the end of March, but the CDC just extended it until June (which may be one reason that TIPS breakevens have hit some minor resistance). That’s a little unfortunate since it means that the moratorium will expire right about the time that the CPI is enjoying favorable comparisons versus 2020. The understating of rent and owners’-equivalent rent inflation, since those are a huge portion of the consumption basket, has an outsized effect on CPI. I want to be fair here to the BLS: in an important sense, the CPI data on rents is not wrong because in fact if a tenant pays less because of the moratorium, then that tenant’s cost of living really did go down. Even though in a free market without such a moratorium his cost of living would have been higher, that’s not the question the BLS is trying to answer. The cost of living is lower in such a case. Of course, that’s temporary, and so when the moratorium is lifted we can expect the BLS will also faithfully report the catch-up. Which means that in the summer, when we would have expected y/y CPI to start to decline again as it faces more difficult comparisons to 2020…it may not, because rents will start to catch up. That’s going to toast the marshmallows of a lot of investors.

Now, there’s one more facet of the cost-of-shelter question and that’s whether home prices have risen too far, too fast and so it’s home prices and asking rents that will have to decline, rather than effective rents re-accelerating. This is a reasonable question. It is true that the ratio of home prices relative to incomes is getting back to levels that in the late 2000s indicated a bubble was getting ready to pop (see chart). For many, many years median home prices relative to median incomes was fairly stable at around 3.4x. Some increase makes sense since homes have been getting bigger, but it does give the appearance of being overextended.

However, last week in Money Illusion and Boiling Frogs I argued that the nominal value of certain real assets might be usefully compared to the level of the money supply as a way of assessing their real value. Comparing the equity market to M2 made the former look less frothy, and the argument is that maybe equity investors aren’t suffering from “money illusion” in the same way that consumers might be (so far). But the same cannot be said for the housing market. The chart below (Source: Bloomberg) divides the home price index (from the FHFA) by M2. While home prices relative to incomes look high, home prices relative to the stock of money look quite low. It is interesting how the QE of the early 2010s shows up as a one-time shift in this ratio, followed by a period of stability, isn’t it? It suggests that maybe home prices didn’t fully adjust to the new money-stock reality after the bubble’s burst in 2008 and the subsequent QE. And maybe such a one-time shift happens again now.

But it might also be the case that the current rapid escalation of home prices is the market’s attempt to get the real value of the housing stock to reflect the rapidly increasing value of the money stock. If that’s the case, then it also suggests that median wages probably will eventually follow. The last people to respond to money illusion generally are the people selling their labor.

I don’t know if this is the ‘right’ answer, and my purpose in these articles isn’t to give the ‘right’ answer. I just want to ask the right questions…and I feel like these are the right questions.

Categories: China, CPI, Housing, Wages Tags: ,

Money Illusion and Boiling Frogs

March 23, 2021 6 comments

“Twice a day we are all forced to await the quotation of the Zurich bourse. Every fresh drop in its value [of Austrian kronen to Swiss franc) is followed by a wave of rising prices … The confidence of Austrian citizens in the currency administration of the State is shaken to its foundation. The State which is perpetually printing new banknotes deceives us with the face value … A housewife who has had no experience of the horrors of currency depreciation has no idea what a blessing stable money is, and how glorious it is to be able to buy with the note in one’s purse the article one had intended to buy at the price one had intended to pay.” – account of Frau Eisenmenger, recounted in When Money Dies (Adam Fergusson).

“Speculation on the stock exchange has spread to all ranks of the population and shares rise like air balloons to limitless heights … My banker congratulates me on every new rise, but he does not dispel the secret uneasiness which my growing wealth arouses in me … it already amounts to millions.” – Ibid.

These two passages come from the contemporaneous observations of an Austrian living through the early stages of the hyperinflation that followed WWI in that country. I don’t for a minute mean to suggest that the global economies are on the verge of hyperinflation, but I present these as an apt illustration of a concept called money illusion. In the first passage, the writer makes plain that the kronen is buying less and less, in terms of real goods, every day. Similarly, it buys less and less in terms of equity shares. The former, we tend to regard as a negative, and the latter as a positive, even though they are both related in this case to the same phenomenon: the unit of measurement is losing its value, so that it buys less real stuff as time passes. Isn’t that interesting? For someone who is continually investing in the equity market – I’m looking at you, millennials – higher prices should strike us as a bad thing just as higher car prices strike us as a bad thing.

I don’t mention that, though, to suggest that equities are a great place to hide out from inflation. In fact, they’re a pretty lousy place: as inflation rises the multiple paid on earnings declines so that even if nominal earnings are rising with inflation equity market prices can’t keep up. That’s not as bad as holding paper money and watching it go to zero, but it ends up being about the same when the inflation gets serious enough that the market itself collapses – as it did in each example of monetary hyperinflation (Germany, Austria, Zimbabwe, etc) that we have seen to date. But again, it isn’t my purpose today to warn about the dangers of treating equities like real assets when multiples are at nosebleed highs.

The interesting part is the money illusion. The writer in the passages above is uneasy, because while she is making millions she understands that those millions are losing value almost as fast (and ultimately, faster) than she can make them. But for a while the higher and higher prints of the market, the rising value of one’s home, and the accelerating increase in wages makes people feel wealthier. And wealthier people are happier and tend to spend more of the marginal wealth, when that wealth is real. But in this case the wealth is an illusion, because that additional wealth buys (at best) the same amount it did previously.

In classical economics, we would call spending more in this circumstance – despite having a similar claim to wealth in real terms – irrational. Although we use dollars to translate our labor into the things we want to buy, we all understand that we are really trading our labor for those things – it’s just that we need a medium of exchange because no one wants to directly exchange groceries for inflation-focused asset management services. More’s the pity. So homo economicus would regard his increasing millions in the market and not feel any wealthier as he knows the units of account are growing weaker. The money dropped into his bank account through a universal direct stimulus also wouldn’t be treated as actual wealth, since if we handed everyone a trillion dollars then obviously we all wouldn’t be living like trillionaires because the people who sell goods and services would adjust their prices (if they did not, then those vendors are voluntarily decreasing their own claim to the real wealth, by accepting smaller real payments in return for the same amount of goods). Wealth is just a claim on the national product. If everybody’s nominal wealth rises, but the nation is not able to produce more units of real output, then in aggregate we clearly are not wealthier because the pie is the same size. (Now, if you hand everyone a trillion dollars except for one guy, then that guy is poorer and everyone else slightly richer. Ergo, direct cash payments to the poor are clearly a way to distribute actual wealth, especially if those who don’t receive those payments also face higher taxes. So fiscal policy here definitely shuffles the deck of the wealthy. It just doesn’t make us wealthier in aggregate.)

The question of how people behave when they see additional income that comes from a greater money supply, rather than from additional productivity/output, is crucially important in monetarism. In the quantity equation of exchange, MV≡PQ, an increase in the quantity of money and in the velocity of money (MV), which is the total nominal amount of expenditures, necessarily equals the real output times the price level of that output (PQ). The amount that is spent equals the amount that is bought. But how the right side divides between P and Q is very, very important. If there is no money illusion, then an increase in the quantity of money will primarily increase prices while output will remain stable. Shopkeepers are unwilling to part with their wares for a smaller piece of the pie in real terms. On the other hand, if money illusion is rife then producers respond to consumers flush with cash by providing as many goods and services as they can; they view the masses as having more actual wealth to spend and so output increases and prices don’t rise as much.

Unfortunately, it seems that money illusion operates primarily when the quantities involved are small, or narrowly distributed. When incremental money creation is widely distributed and significant in size, then (as the second quote at the start of this article suggests) consumers, suppliers, and investors eventually figure it out. When that happens, a change in M is almost fully reflected in a change in P, as over time it usually is anyway. So the secret of recovering from a negative economic shock by expansionary monetary policy is to boil the frog slowly.

No one involved in current policy circles is interested in boiling the frog slowly. And that means it’s not going to end well.

In this context, the current bubbly stock market looks decidedly better. The chart below shows the S&P 500 divided by M2 (and multiplied by 100 because sometimes I don’t like looking at decimals on my y-axis). Now, the S&P 500 level isn’t the purest look at the total value of the equity market, but you get the general idea here – stocks have outrun the growth rate in the money supply, even over the last year, but the new records we are hitting are mostly on money vapor.

Summary of My Post-CPI Tweets (March 2021)

March 10, 2021 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, issuers and risk managers with interests in this area be sure to stop by Enduring Investments!

  • Another #CPI morning as spring is getting ready to spring here in the northeast. And with spring, more activity.
  • Today’s #inflation figure will be the last one to be compared to pre-COVID year-agos. The easy comps start next month. So, while consensus today is for +0.2% on core, that will still not move core much since last Feb it was +0.21%.
  • Headline will jump a bit, because gasoline has been rising, but the real headlines if any will be below the hood. Last month core was flat, due to soft housing and a somewhat surprising decline in used cars and pharmaceuticals.
  • I expect we will see the used cars number reverse this month (Black Book was strong), and with the end of lockdowns might see some strength in the covid categories. Pharma price hikes ought to eventually show up. But they’ve been confounding me.
  • Global supply chains are a disaster and raw materials and packaging prices are spiking – the Texas freeze shut-down did NOT help polypropylene prices! – so goods prices ought to continue to rise. Eye on apparel as the canary there.
  • The rent story is a passing one. But probably not yet, which means OER and Primary Rents should still look a little soggy. Asking rents are jumping, but measured rents are not – because of the eviction moratorium. If you’re not paying rent, it’s not a cost of living!!
  • In this quarterly chart, you can see the divergence between asking and realized rents. The divergence began in Q3…which is when the eviction moratorium was enacted. That’s not coincidental.
  • In the more-recent COVID relief bill, the eviction moratorium was not extended past March 31st, which was a bit of a surprise. That could still change, but when the moratorium eventually expires I am pretty sure we’ll see a rapid catch-up of rents. But not today’s story yet.
  • My calculations are that if the end of the eviction moratorium caused effective rents to catch up to asking rents, the effect on OER and Primary Rents would add something like 0.9% to core CPI.  (!) So that’s 2021’s following wind to prices.
  • As always, I want to be sure to remind you that the Fed does not care about inflation any more. Someday they will, but not yet. They’ve even stopped reporting weekly M2! They believe they have the tools to stop inflation so they’re not worried. Ergo, you’re on your own.
  • Although not exactly. We’re here to help. If you have interest in how to hedge/invest in the inflationary period approaching, visit
  • And for a summary of today’s series of tweets, you can check later at
  • Thanks for coming with me on this #CPI journey this morning. Buckle in.
  • Core looks like 0.10% flat, dropping y/y to 1.28%. That will be the low for…probably 10 years.
  • Even the +0.1% was higher than the last couple of months. But the easy comps start next month. Then some hard ones. But by the time we get to the hard comps, rents should be catching back up. Worth looking at my “conflicting frames” piece on the blog.
  • Used Cars and trucks surprisingly fell again, -0.91% m/m. That’s at odds with the private surveys, but there’s sometimes a wiggle before they catch up.
  • Apparel dropped -0.74% m/m. Also odd. Pharma PLUNGED -0.75% m/m. As a result, the core goods y/y figure dropped to 1.3% from 1.7%! That’s the story.
  • Rents were actually okay! OER was +0.27% and Primary Rents +0.20%. Really, today’s story in some ways is the opposite of what I expected. Rents solid, goods prices soft.
  • Really odd stuff today. Airfares -5.1% m/m, despite the heaviest air traffic in a year. Lodging Away from Home -2.3%, ditto. Although some of that might be a weather effect. Still anti-anecdotal.
  • Doctor’s services, though, jumped +2.01% m/m! To 5.1% y/y, highest in a while.
  • Hospital services remained a bit soft. Still, the overall Medical Care subcategory accelerated slightly to 2.00% y/y from 1.95% y/y, despite the drop in Pharma, thanks to docs.
  • So Core ex-housing dropped, to 1.16% from 1.25%. But for weird reasons, not services but goods!
  • Core goods and services back together after core goods had rocketed ahead. Again, this is super weird. Shipping costs are through the roof. Packaging and raw materials prices are having moves like we’ve never seen. And goods prices are declining?
  • sorry…decelerating. Let me be precise.
  • Biggest monthly declines in core: Jewelry (-29.9% annualized), Lodging Away from Home (-24.4%), Public Transportation (?) (-24.0%), Men’s/Boys’ Apparel -23.6%, Infants’/Toddlers’ Apparel -21.6%, Tenants’/Household Insurance -13.5%, Used Cars/Trucks -10.3%.
  • The decline in insurance makes sense. Insurance companies are having to give rebates because their loss ratios were too good (that is, they didn’t have to pay out as much as underwriting had expected). So that will be a CPI decline. I get that. Only 0.4% of CPI though.
  • Largest core increases: Car/Truck Rental (+135% annualized), and that’s it for >10% annualized.
  • Pharma y/y. Difficult supply chain for APIs and more announced price hikes in January than is normal. And prices are falling. That’s a conundrum.
  • This is the divergence I mentioned in private surveys vs CPI for used cars and trucks. I could believe it cresting at a lower level but the latest zig higher suggested we have another zag in CPI. Next month, maybe.
  • Brilliant catch. Although lockdowns are lifting, the BLS had trouble doing some collections. More likely weather, but blamed on Covid because we blame everything on Covid. But that explains a lot of weird moves. Good catch @TOzgokmen
  • Well, that makes next month even more interesting. Because the rent numbers aren’t likely to have been much impacted by weather, but physical goods prices?
  • And again, like I said the other surprise was that rents did not continue their recent trend of softness. Y/y on OER was flat. There’s a lot of catch-up ahead.
  • One thing which has changed in the last year which isn’t likely to change back very soon is the VOLATILITY in the monthly CPI figures – not just the core or headline, but the subcomponents. That will persist for a while.
  • OK, four pieces charts. Food and Energy relatively normal.
  • Core goods – slightly off the boil but will be interesting for sure to see how much of this was due to “collection problems” at BLS.
  • This is where there’s real weakness, but it’s airfares, hospital services…though doctor’s services added a bit this month. Insurance rebates likely pressured this in February. Again lots of volatility.
  • And then Rent of Shelter, normally the least volatile. This month, rents were actually pretty normal but lodging away from home dragged further. I do think that hotel rates are unlikely to keep sliding. This might also be a collection issue.
  • Think that’s going to do it for today. The bottom line is that rents were stronger-than-expected, lots of other things weaker, but collection issues make it easy to be skeptical that goods prices are suddenly decelerating. Next month we’ll get hopefully a cleaner picture. BUT…
  • …BUT we will also get the beginning of the severe base effects. In three months, core CPI will be near or above 3%. We all know it, but it will be interesting to see if markets get nervous anyway. Thanks for tuning in. Stop by !
  • FWIW, looks to me like median CPI ought to be more like +0.26% compared to core +0.10%. My confidence in that is lower than usual because of something quirky with my spreadsheet, but it highlights that the core was dragged down by large declines from small categories.

The best observation of the day wasn’t mine. The problem with pulling in data automatically, rather than reading the report, is you will miss the footnotes! And the footnote pointed out by @TOzgokmen was a very important one. It slaps much larger-than-normal error bars around what are already more volatile-than-normal data. I suspect that this was not likely to have a big effect on rent data collection, but more likely on goods and services where specific outlets were likely to be closed by the bad weather. I may be wrong about that, but it does go a long way to helping understand the weird fact that rents were solid (instead of weak as expected) and goods prices were weak (instead of strong as expected). One never should put too much weight on any one month’s figure, but this diminishes the anecdotal value even more. On to next month.

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (January 2021)

January 13, 2021 1 comment

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

  • Welcome to #CPI Day 2021! We get the last of 2020’s CPI figures today.
  • There’s always volatility in year-end figures, and this one is no exception. Last month, in fact, was pretty weird. In the Nov CPI we had soft housing, very strong Apparel. Broad softness sprinkled with some large moves in small categories. My write-up: Summary of My Post-CPI Tweets (December 2020)
  • As a result, while core CPI was higher-than-expected, Median inflation (which is a steadier measure) was soft. However, skewness on the upside is DIFFERENT from the way we’ve seen it for a while and I’ll be interested to see if that remains.
  • Economists’ consensus is that Core is gonna soften – the m/m core CPI consensus is around 0.12%. I think that’s mostly a call on rents, which have been softening.
  • But here’s the thing – rents haven’t really been softening much outside of big cities. What has been changing is that landlords have been expecting less rent due to financially-stressed tenants. This shows up in CPI as softening average rent growth.
  • And that could change, although probably not until next month. Payments looked soft in December. But rent tracker indices have payments a bit better this month, and they should be: there was just another Federal money drop.
  • Next month or two, we should see a rebound in rents. And in the long run, we definitely will because home prices are jumping and these two can’t diverge forever.
  • Away from Shelter, dislocations in the supply chain remain and part of the trick over the next 6 months is going to be teasing out the COVID effects from the long-term effects. Freight costs have risen steeply and there are goods shortages in places b/c of container shortages!
  • Another category I’m watching that has been weak for a while: Medicinal Drugs. Interestingly, this month (again, probably starts to hit Jan CPI when it is released next month) some major pharma manufacturers announced price increases.
  • Not a huge surprise: pharma prices had been suppressed when President Trump was threatening to introduce Most Favored Nation rules (saying companies can’t charge Americans more than other countries). Pharma played nice. CPI-Medicinal Drugs is negative y/y!
  • I wrote about that here: Drug Prices and Most-Favored-Nation Clauses: Considerations back in August. But the Biden Administration won’t be doing that. Ergo, it’s safe to raise prices again. And they have. We’ll see how much – starting next month.
  • That’s all for the walk-up. Expect volatility! I will probably focus on the ex-shelter number. BTW, be aware that monthly comps get super easy after this month, for a few months. Core CPI will be over 2.5% y/y, probably, by April & push 3% in May. Then the comps get much harder.
  • Do remember, as I constantly remind: the #Fed doesn’t care one bit about inflation. But if YOU do, and have interests in how to hedge/invest in the inflationary period approaching, visit
  • And one more note: I will be on Bloomberg TV with @adsteel and @GuyJohnsonTV at 10:10ET this morning. And my interview with @MetreSteven on @RealVision just dropped this morning. A lot happening in inflation today!! Good luck…
  • Core CPI was +0.09%, a touch softer than expected. Y/Y at 1.62%.

  • Seems like Dec is always weak…even accounting for the seasonals! Let’s see. Primary rents rose 0.10%, y/y declined further to 2.28% from 2.45%. As I said, that will start changing soon. OER was +0.14%, y/y down to 2.17% from 2.28%.
  • Apparel took another big jump, +1.36% m/m. That’s part of the general strength in core goods. Core goods at 1.7% y/y, up from 1% just three months ago!
  • Check THIS out. Core goods inflation above core services inflation for the first time in years. Since the GFC, actually. A lot of that is supply chain folks. But a lot of it is people buying products with government money drops.

  • That rise in core goods happened even with CPI-Used Cars and Trucks -1.15% on the month, second weak month in a row. Looks like the used car prices in the CPI aren’t going to catch up with the private surveys on the upside, as they didn’t on the downside.

  • Airfares slipped -2.29% after +3.49% last month. Lodging Away from Home flat vs +3.93% last month. Motor Vehicle Insurance though continued to rebound, +1.42% after +1.23% last month. Those are my main “covid categories.”
  • In Medical Care, which was down for the second month in a row: Medicinal Drugs -0.24% (y/y down to -2.13%!), Doctors’ Services -0.02% (y/y to 1.74%), Hospital Services +0.30% (y/y 2.99%).
  • I’ve said it before and I’ll say it again. It’s hard to measure medical care, but these are just silly numbers. I doubt doctors are charging less when their costs have gone up enormously. But perhaps they’re charging CONSUMERS less, and we’re measuring consumer prices? Hmm.
  • CPI for Medicinal Drugs, y/y. Come on, man.

  • Core inflation ex-shelter was roughly unchanged this month, +1.45% y/y. Was +1.46% last month. It hasn’t been much higher than 1.7% since 2012.
  • So only two categories had large negative changes: Car and Truck Rental, -49.9% annualized, and Used Cars and Trucks, -12.96%. The latter coming down from a high level. But long list of >10% gainers again:
  • >10% annualized: Jewelry and Watches (39.5%), Men’s/Boys Apparel (+31.8%), Women’s/Girls Apparel (+18.3%), Car Insurance (+17.9%), Misc Personal Goods (+15.5%), Personal Care Goods (+12.9%), Tobacco/smoking (+12.9%), Misc Personal Svcs (+10.8%).
  • Those are just non-food and energy. Also >10% annualized increases in Dairy, Nonalcoholic Beverages, Fuel Oil, and Motor Fuel. But we know those are volatile. I include them in case anyone says “the government ignores milk.”
  • Anyway, Median should be soft again but not as soft as core this month. Median category will be a housing regional so it’s just a guess but I’m saying +0.13% m/m, 2.23% y/y. Core will actually pass over Median in a few months, I think, due to base effects.
  • College Tuition and Fees: +0.74% y/y vs +0.58%. I’ve talked elsewhere about how there’s a quality change here that the BLS knows about but is ignoring for now b/c should reverse: online college ain’t same as in-person college.
  • University costs themselves are up a lot. Talked at length to a university CFO consultant yesterday and they believe many of these costs will remain BUT there are some really interesting applications of virtual education that I can’t fit in here. 🙂
  • Circling back, just want to put the Apparel jump into context. Here is the Apparel price level index. So acceleration in 2011 (after years of nothing), slow deflation, crash into COVID, and just recovering some pricing power. Will be interesting to see how far it extends.

  • Update to our OER model. And honestly, everyone’s model looks something like this – lagged effect of home price rises is a big contributor, as are incomes, to where rents should go. But we’re looking at measured rents ADJUSTED for non-collection. That’s the key.

  • Here’s a fun one. 10-year inflation swaps are about to cross above current median inflation. That hasn’t happened in a long time. You would think the forward should be above, at least because tails tend to be to the upside, but they almost never are. At least, recently.

  • Distribution of y/y price changes by bottom-level category. Big spike is OER of course. But a really wide dispersion otherwise. Chaos.

  • Four-Pieces charts and then I’ll wrap up. Piece 1: Food & Energy.

  • Piece 2: Core Goods. Wheee! Honestly this overshoots our models so I think at least some of it are dislocations. But some of it is real, too much money pushing too few goods. And some is the recently-weak USD, so if you get a much stronger dollar (@MetreSteven) it could change.

  • Piece 3: Core Services less Rent of Shelter. This is the conundrum. I can’t imagine doctors services and hospital services stay depressed in this world. Other services may (office cleaning if there are no offices), but that’s also a consumption basket change. Stay tuned here.

  • Piece 4, Rent of Shelter. I think this will start to reverse as early as next month when the next gov’t checks go out. And the Biden Administration promises more. So delinquencies should decline, raising measured rents.

  • And that’s all for today. I’ll post a summary of these tweets in a bit. Remember to look up my interview on @RealVision, tune in to @BloombergTV at 10:10 to see me there, and visit if you need an inflation nerd!

Recent inflation prints have been held down by soft rents, and that continued this month. A lot of this is artificial: when landlords expect to collect less rent…which is not unreasonable during a recession…then this shows up as a decline in collected rents. But when/if those renters get more current, it shows up as a reacceleration in rents. That’s what I expect will happen, and it could happen soon since more Federal largesse is on its way. It’s an upside risk for the next few months. Although, in another sense, it isn’t really a risk: it’s what we should be expecting to see, given what is happening in home prices.

Rents are the main part of core services inflation. Because of the softness in rents and the softness in medical care services – which is a real head-scratcher – core services inflation fell below core goods inflation this month for the first time in a very long time. Now, normally you don’t see goods inflation in the middle of a recession, but then again normally Washington DC isn’t throwing thousands of dollars into the account of every family. Too much money: check. And supply chains are stressed. Too few goods: check. No surprise we’re seeing goods inflation.

So really, the wiggles in inflation we have seen over the last year are not particularly surprising in themselves, and it’s easy to explain them by falling back on the excuse du jour: “COVID.” Certainly, a lot of the chaotic pricing environment is due to Covid and the related disruption in our economic system. But the question is, what will happen on the other side? We have had massive money growth, with declining velocity until last quarter. Will velocity continue to decline? I am skeptical of that. Precautionary cash balances are higher than they ought to be, given where rates are, because people are nervous and when you are nervous you keep more in reserve. But this won’t be true forever. And we know that, behaviorally, the velocity of “found money”/windfalls is higher than the velocity of earned money, and moreover people are less price-sensitive when they spend a windfall. So I expect that as things go back to normal, inflation will rise – and probably a lot.

This is the test! Modern Monetary Theory holds you can print all you want, with no consequences, subject to certain not-really-binding constraints. The last person who offered me free wealth with no risk was a Nigerian prince, and I didn’t believe him either. I will say though that if MMT works, then we’ve been doing monetary policy wrong for a hundred years (but then, we also leached people to cure them, for hundreds of years) and all of our historical explanations are wrong – and someone will have to explain why in the past, the price level always followed the GDP-adjusted money supply.

Now, over the next four or five months it will be much easier to believe the inflation story. While core inflation was +0.24% last January and +0.22% last February, it was -0.10% in March, -0.45% in April, and -0.06% in May. By mid-year, that is, we will be around 2.8% core CPI y/y (if we just get 0.2% per month) before the comps turn much more difficult. Even though this is fully known, and even though it will therefore be a violation of the Efficient Markets Hypothesis, it will not stop people from becoming alarmed and for the markets to respond accordingly! So buckle in – at the very least, the first half of 2021 will be extraordinarily interesting. 

Summary of My Post-CPI Tweets (November 2020)

November 12, 2020 1 comment

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

  • Welcome to #CPI Day! And to my monthly yammering on the figure.
  • Once again, economists are looking for a soft number today. There is a very strong confidence in the economics community (and in some among the punditry) that the disinflation/deflation wave is JUST ABOUT HERE! So every month they expect it to arrive. So far, not.
  • There is as yet no evidence for such a thing as deflation in the data. Outside of housing, in fact, inflation seems to be broadening.
  • For a discussion of housing, see my post from october 23 here: For a discussion of some of the evidence of broadening, my article here:
  • So the “consensus” forecasts this month are for 0.1% on core, and 1.7% y/y. Actually Bloomberg says consensus is 0.2% on core, but that’s not consistent with a consensus of 1.7% on core.
  • Bottom line is that getting core to drop to 1.6% is going to be hard because in October 2019, core only rose 0.115%. And Core CPI last month almost rounded to 1.8%. So you need a really weak number, almost flat in fact, to get rounding down to 1.6% y/y on core.
  • (Bloomberg has 42 respondents to the m/m number and 67 respondents to the y/y number…which is why their figures on the consensus for the m/m number and the y/y number are inconsistent).
  • A rise to 1.8% on core CPI is much more likely…a mere 0.15% m/m would do it. As a reminder, the last 4 core CPI figures were +0.24%, +0.62%, +0.39%, and +0.19%.
  • On the granularity of today’s number: another huge 0.4%-0.6% surprise seems unlikely. We’ve gotten most of the upside catch-up to Used Cars vs the private surveys…so that could go either way and is not a slam-dunk add as it has been. Other covid categories remain subdued.
  • The big question in recent months, and really the only DOWNWARD pressure in major categories, has been in rents. Last month, OER rose only 0.06%, and primary rents only 0.12%.
  • That doesn’t look like it’s asking rents, which are plummeting in the cities and rising outside of the cities. Landlords might be saying they expect to collect less rent going forward, which would pressure rents lower…
  • …but actual rents being paid are on par with where they were a year ago so eventually reality should catch up with that concern.
  • Mortgage delinquencies, in fact, declined this month – that’s not part of CPI, but an anecdote that the payments crisis in rental housing is exaggerated I think. Much worse in office rents though! Work from home is killing office complexes but that’s not in the CPI.
  • I’m also still looking for the anecdotal pressures we are seeing in medical care, which haven’t yet showed up.
  • Do remember of course that the #Fed doesn’t care one bit about inflation. But if you do, and have interests in how to hedge/invest in the inflationary period approaching, visit and drop us a line.
  • And one more thing: I’m scheduled to be on @TDANetwork tomorrow with @NPetallides at about 5:20ET. We’ll be talking about investing to hedge inflation. And probably other inflation stuff. Tune in!
  • OK, buckle up that chinstrap for a little BLS data roller derby. The game is housing, versus everything except housing. I think a better chance for a high surprise than a low surprise. See you on the other side in about 7 minutes.
  • Well…nope! m/m core CPI only +0.01%, so y/y declines to 1.63%. Big surprise to me. A modest surprise to the consensus. Let’s see what happened there.
  • Another big decline in Lodging Away from Home, -3.2% m/m…after it has already fallen so far. That’s part of this. Big drop in Medical, more on that in a moment.
  • Overall, interestingly, Core Goods rose to 1.2% y/y from 1.0% (and 0.4% two months ago), but Core Services fell to 1.7% from 1.9% (and 2.2% two months ago).
  • Core goods. This is super interesting…hasn’t been this far away from deflation since 2012.
  • Apparel also took another dump, -1.16% m/m. Used Cars was down slightly, -0.08% m/m. As previously noted, the big spike in private surveys was already in CPI.
  • One more covid category that’s surprising: airfares, +6.3% m/m after -2% last month. It’s seasonally time for airfares to rise but this means they rose even more. Then again, they’d fallen so far that was easier. Still surprising.
  • Now to housing: Primary rents rose 0.16% m/m, more than last month’s 0.12% but the y/y still slowed to 2.67%. Owners’ Equivalent Rent was +0.22% vs 0.06% last month, holding the y/y steady at 2.50%. These numbers make lots more sense.
  • So not really housing pushing down vs ex-housing pushing up…housing was stable, only a touch soft; and some categories were strong. But some were really weak and oddly so. Medical for example.
  • Here is the Medical Care CPI subindex, y/y. It absolutely tanked this month. Pharma fell into deflation y/y. Doctors’ Services fell to 1.87% y/y from 2.09%. Hospital Services were -0.58% m/m!
  • THAT is the story of this month’s CPI, I think. I should note there isn’t a lot of reason to think that PRICES should be DECLINING in health care as COSTS rise precipitously.
  • This could be a compositional issue: the costs of telehealth are lower than for doctor visits, so even though the costs of medical procedures in-hospital are rising a lot, the smaller decline in a wider spending item may be dominating.
  • Health Insurance costs are dropping sharply on a y/y basis, down to +10.2% from +14.1% last month. Still high obviously but the wave is receding. Reminder that health insurance in the CPI doesn’t measure insurance policies but the implied profitability.
  • It has been my expectation for a while that the rise in health insurance inflation, b/c of how it’s measured, might be catching inflation that hadn’t been caught yet – hard to believe insurer profitability soared like that. But so far, haven’t seen that in the rest of medical.
  • That said, data collection issues in medical care right now might have something to do with this. The BLS isn’t currently hammering health care workers to respond to its surveys/calls, for obvious reasons.
  • Motor Vehicle insurance, to change topics here, was also weak again. People aren’t driving so much so insurance companies are cutting prices and/or rebating a lot (generally required by insurance boards in a lot of states when claims are less than expected).
  • Here is car insurance y/y. It’s actually 1.7% of CPI, so it matters.
  • Month’s biggest declining categories in core (annualized chg): Infants’ and Toddler’s Apparel (-34%), Lodging AFH (-32%), Men/Boy’s Apparel (-30.6%), Jewelry/Watches (-24.5%), Motor Vehicle Ins (-24%), Women’s/Girls Apparel (-10.6%).
  • Biggest increases: Car/Truck Rental (+136%), Public Transportation (+36.5%), Footwear (+14.6%).
  • Early peek at Median…my guess is +0.16% m/m, which would make the y/y 2.46% (2.51% last month). Not exactly deflation, but certainly off the highs. Don’t get used to it.
  • The “Inflation Angst” index, which is our calculation of “perceived” inflation minus core inflation, declined slightly this month.
  • Four Pieces charts. First piece: Food & Energy
  • Core Goods. This is a story, and a little surprising if this continues. This includes Medicinal Drugs, by the way, which is in deflation – so very curious. Supply-side constraints meeting big cash infusions to consumers: you don’t buy more services, you buy more stuff.
  • Third piece, core services less rent of shelter. Big drop, mainly due to medical care. Again, I think that is the real big story and surprise this month. I have a SUPER hard time believing that hospitals and doctors are going to be cutting prices in a COVID world. Even post.
  • Last chart before I wrap up: since I recently wrote about the broadening of inflation here’s a tiny update to the Enduring Investments Inflation Diffusion Index (EIIDI). Declined modestly to -16 this month.
  • OK, summing up…this month’s number was broadly tame, with the notable exception of medical care. Housing, other than Lodging Away from Home, was stable. Airfares showed a surprising increase. But the big story, and the one that I have trouble believing, was medical care.
  • Disinflationistas should probably not take a lot of comfort in this number, but surely neither can inflationistas. So whatever -ista you are, ista unexciting number fer ya.
  • Going forward – we still have this little issue of a massive increase in the transactional  money supply. There’s no way to make it go away easily. Uncertainty will keep cash balances high and velocity low – but any recovery in confidence could unleash the spending beast.
  • We are already seeing that in core goods. Now, if the Fed and Treasury somehow get religion, the inflation surge might be only modest, 4%ish next year is my guess. But we just elected people who believe in MMT, assuming Biden/Harris counts are confirmed by the states.
  • Not that the monetary authorities were behaving particularly responsibly in 2020, but if the MMT crowd gets traction things could get super ugly. Thankfully, not today’s problem. Right now breakevens are down a few bps, but  still way cheap to where I think they’re going.
  • That’s all for now. Thanks for tuning in. Remember I’ll be on @TDANetwork tomorrow evening, 5:20pm ET or so! And stop by if you wonder what it is we do.

This was a long one this month, so I won’t add a whole lot to what I wrote above, and what I wrote recently about housing. Maybe I need to do one on Medical Care, but that’s a fairly inscrutable index that’s hard to model especially at times like this when there are lots of moving parts. But the bottom line for medical care is – it’s becoming lots more costly to practice. As I mentioned, there might be savings in the transition of more routine monitoring care to televisits from in-person visits, but I’m not sure how much of that is permanent: an important part of even a routine checkup is looking for things that the patient might not be able to observe directly, e.g. glandular swelling. Moreover, everything else that is in-person has become lots more costly to do, and this is likely to remain the case even after COVID is long gone (to say nothing of the fact that hospitals are going to need to recoup lots of revenue lost on elective surgeries over the duration of the pandemic). So I don’t know exactly what is going on there, but it’s really hard for me to imagine that medical care is getting vastly cheaper.

Now, in pharmaceuticals (“Medicinal Drugs”) the answer is a little less clear. Back in August I wrote about what the President’s push to make Pharma companies accept “Most-Favored Nation” clauses would mean for domestic drug prices. My conclusion in part was “I suspect that most pharmaceutical companies will end up lowering prices a little bit in the US and in other countries where prices are similar, and only selling them in countries that now pay a very low price to the extent that those foreign countries and/or international charities subsidize those purchases.” So maybe that’s part of what is happening here. If it is, then we can expect that to change pretty rapidly under a President Biden, who seems bent on reversing by executive action pretty much everything that President Trump did over the last four years. (I suspect that this might have something to do with the timing of Pfizer’s vaccine announcement, after the election!) But in any event, I think it’s unlikely that we are about to enter a period of sustained deflation in the price of drugs. And outside of that, this month was fairly normal on the inflation front. To be sure, that means inflation was lower than it was in July and August, but it also isn’t really at zero.

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (October 2020)

October 13, 2020 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, issuers and risk managers with interests in this area be sure to stop by Enduring Investments!

  • Another COVID-era #CPI report coming up this morning. After two big upside surprises versus economic forecasts, the forecasts this month are …lower.
  • Last month, economists were looking for a “strong” 0.2%, something 0.21%-0.24%, and got close to 0.39%. That was a month after the 0.62% print.
  • This month, the forecasts are for 0.2% on core, but a 1.7% y/y. We can look at the year-ago number and figure out that to keep 1.7% from rounding to 1.8%, core can’t be 0.21% or higher. So economists are clearly expecting a “soft” 0.2% on core.
  • …something closer to what was normal before COVID. I’m still not sure we get normal.
  • The “COVID categories” (hotels, airfares, etc) still haven’t fully recovered, and despite the recent bump in used car CPI it’s still well behind private surveys which continue to accelerate. Never know if that will happen THIS month but still looks like some room there.
  • We’re also starting to see reports of pressure in medical care, which so far hasn’t made it into the CPI in a significant way. And the weakness in the dollar since spring will eventually help apparel a little.
  • Now, we still have some near-term downside risk from housing, but more and more any weakness there (and it has been a touch soft, which makes the upside surprises even more surprising) looks transitory.
  • We’ve all seen the reports of plummeting rents. But those are in cities, and it turns out that a lot of renters don’t live in cities. Outside of cities, rents don’t appear to be under pressure.
  • If renters are being more delinquent such that landlords expect to collect less, this would pressure the measurement of rent inflation – but the NMHC tracker says the share paying rent through Oct 6 is the same level as in 2019.
  • Meanwhile, there are signs from the housing market that there is actually upside risk ahead – I really meant to write a column this month on the housing indicators but just didn’t get to it.
  • For example, one important longer-term driver of rents and OER and home prices is incomes, and incomes are very strong right now thanks to federal income replacement. Will they be this strong in 4 months? Probably not, but presently these incomes are driving housing outcomes.
  • All that said, OER and primary rents have been a little weak recently and my gut is bracing for something even softer. But there’s no analysis there, just a concern. Even a little housing softness could produce a ‘soft’ 0.2%.
  • Rents are really the only ‘normal’ thing that can drag this number lower. But this is the COVID era, and nothing is normal, so there can always be weird one-offs, in both directions. With M2 rising at 24% per year, these are more likely to be on the positive side.
  • All of these one-offs on the high side are what inflation looks like, after all. Inflation is like microwave popcorn. The kernels go off one at a time, and each has a micro “explanation.” But eventually the bag is full, and the MACRO explanation was “heat.”
  • Outside of rents, inflation is broadening, quickening, and deepening. It surprises me that it has happened so early…I thought it would take until 2021…but if we get a third surprise today then we’ll have to start thinking it’s here already.
  • Do remember of course that the #Fed doesn’t care one bit about inflation. But if you do, and have interests in how to hedge/invest in the inflationary period approaching, visit and drop me a line. Good luck today.
  • Well, soft 0.2% it is. +0.19% on core CPI.
  • y/y on core at 1.73%, so basically unchanged from last month.
  • OK, so used cars was +6.7% m/m, even more than last month’s jump. Core goods, partly as a result, went from 0.4% y/y to 1.0% y/y. But core services plunged from 2.2% to 1.9%. And where?
  • Yep, OER was only +0.06% m/m, which pushed the y/y down to 2.49% from 2.69%. Primary rents +0.12% m/m, so y/y fell to 2.72% from 2.95%. My gut was right – there was (near-term) downward pressure there.
  • Lodging away from home, which had been recovering, slipped back some last month -0.38% m/m. I guess the end of the summer vacation season means it’s all business travelers, and not many of those.
  • Apparel fell, -0.45% m/m, despite weaker dollar. But the real surprise might be medical care, which FELL despite lots of evidence that prices are increasing. Need some charts here.
  • Physicians’ services -0.29% m/m. Really? Talk to any doctors who are doing price cuts recently?
  • Amazing that we were able to get an 0.2% even with housing so soft (and again, the bigger indicators on housing are pointing higher). Core inflation ex-housing rose to 1.50% y/y. Disinflationary pulse from COVID basically over already.
  • College tuition and fees fell to 0.71% y/y from 1.31%. This is clearly a quality effect that isn’t being captured by a quality adjustment, and the BLS knows it but can’t figure an easy fix for what is a 1-year problem. Remote-learning isn’t worth the same as in-person.
  • Tuition had been under pressure anyway because endowment returns had been fantastic for a while, but this dip is because colleges can’t charge the same for e-college.
  • Motor vehicle insurance continues to be a drag on services inflation. People are just not driving as much, and insurance companies are rebating premiums. Biggest 1m declines this month were Infants/Toddlers Apparel (-36% annualized) and Motor Vehicle Insurance (-35%).
  • The surprising part of that might be the fact that Motor Vehicle Insurance has a 1.7% weight in the CPI. That seems like a lot, but we only notice it once a year when we get the renewal.
  • Biggest core gainers this month were Motor Vehicle Fees (+10% annualized 1m change) – governments gotta make it somewhere! – Public transportation, jewelry, car & truck rental, used cars, leased cars, miscellaneous personal goods.
  • Health insurance is also finally coming off the boil.
  • m/m decline in health insurance (NSA) is largest in a long long time.
  • …I guess that decline in health insurance is because people aren’t going to the doctor for minor maladies as much? But of course remember health insurance in the CPI is a residual, not a direct measurement of premiums.
  • So here is OER versus our ensemble model. This month I REALLY have to do a column on housing, because the right side of this graph has been revising HIGHER while the spot numbers have been surprising lower. There are big reasons to think rents are NOT about to decline hard.
  • Forgot to mention one of the covid categories: airfares were -2.0% m/m after +1.2% last month.
  • The jump in used car CPI was, as I noted up top, not really surprising. But it looks like we’ve squeezed most of that lemon (no car pun intended) unless the private surveys keep accelerating.
  • So, despite an as-expected number, bond breakevens have plunged 3.5bps since the print. Investors are conditioned to not ever take inflation breakevens much above 2% or swaps above 2.5%, no matter the outlook. That’s a gonna hurt.
  • Sorry for the break – calculations. Here’s a fun one. It’s our measure of perceived inflation minus core inflation (consider it “inflation angst”), versus the subsequent return to gold.
  • Four pieces: Food & Energy, trendless.
  • Core goods, impressive. Although a lot of that is used cars. Pharmaceuticals pretty soft, import prices not worrisome yet. Apparel soft. So this might be best we can expect from this piece, about 20% of the CPI.
  • Core services less rent of shelter. Settled back a bit, although as noted I’m skeptical that medical care costs are about to go into retreat…
  • And finally, rent of shelter. A lot of this deceleration is hotels, but as noted earlier rents are definitely soft and that’s the big story this month.
  • So, to sum up: housing inflation looks soft, but forward-looking indicators there are pretty solid as long as incomes don’t collapse again (they’ll decelerate and maybe even decline, just need them to not collapse). Outside of housing, there’s broadening of price pressures.
  • Yes, core goods exaggerates where those pressures are at the moment, but they are definitely there. And with money supply rolling 24% y/y, it’s going to persist. The question for Keynesians is: where is the deflation, man? We never even got close!
  • Thanks for tuning in. Have a great day.

Later this month, I definitely need to talk more about housing. Since housing is always the biggest and slowest piece of consumption, any argument about meaningful disinflation or inflation must include a discussion about housing. Right now, when there isn’t an overall inflationary or disinflationary trend, the slow waves in rents are really the main driver of core, and everything else is noise around that trend. When we get into a more-extended inflationary or disinflationary trend, then housing will likely follow the overall underlying trend. This hasn’t happened, though, in decades – which is why most models of rental inflation now tend to be built on a nominal frame rather than in real terms. But I digress.

Most of the main rebound of the “Covid” categories seems to be over. While those categories – apparel, airfares, lodging away from home, food away from home – still sport prices below their pre-Covid levels, it may be that they just don’t come all the way back any time soon. Ergo, the potential for upside surprises from those categories, going forward, is lessened. Similarly, I’m not sure we have a lot more upside to used car prices, as CPI has mostly caught up to the private surveys (of course, used car prices might still go higher, but at least the CPI has caught up to what we already knew). So, again, we come back to rents. Will rents continue to decelerate? The headlines suggest an implosion of the rental property market. But in the meantime, the median price of existing home sales was recently reported as +11.4% y/y, the biggest jump since 2013 (and back then, we were still rebounding from the financial crisis). Home prices and rents cannot diverge for long; they are substitutes.

And with the money supply spiraling higher at an all-time record pace, it is hard to imagine that hard assets like homes will see prices decline, or even level off. Think about it this way: if you have an exchange rate between apples and bananas, say 1:1, and suddenly there is a bumper crop of bananas, then you’d expect the price of bananas fall relative to apples. Right now there is a bumper crop of money, and so it’s reasonable to expect the price of money to fall relative to the price of real assets like houses (each dollar buys fewer houses). Of course, what that means is that the price of houses, in dollar terms, ought to keep rising.

If that happens, then the recent softening of rents is likely to be temporary. That’s the next phase of the inflation puzzle – looking for the rebound in rents.

Summary of My Post-CPI Tweets (September 2020)

September 11, 2020 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, issuers and risk managers with interests in this area be sure to stop by Enduring Investments!

  • #CPI Day, on 9/11. I don’t remember that ever happening before and I apologize in advance if my thoughts are more scattered than usual.
  • There will be more people with attention on this #inflation number – or would be, if it wasn’t 9/11 – than there has been in some time since last month’s number was so incredible.
  • Some people thought that August’s +0.62% rise in core CPI was just a snap-back from prior weakness, but an examination of the “covid components” made it clear that it wasn’t.
  • While the categories that were depressed in March and April have rebounded some, most of the damage to pricing remains. Airfares have only recovered 20% of their “Covid decline”; Apparel 29%; Lodging Away from Home 14%; and Car/Truck Rental 66%.
  • People made a big deal last month about the jump in Motor Vehicle Insurance, which is one damaged category that has recovered 85% of its prior losses – but that’s only 2% of core CPI. And that’s the one I’m least convinced really ought to return to normal!
  • There was also strength in cellular telephone services, but that seems unlikely to be related to COVID. It could be a quirk, but that’s the only potentially quirky figure from last month. And there’s actually a chance that’s legit.
  • Meanwhile, and significantly, Used Cars CPI is wayyyyyy behind where the Black Book survey says it will be in a few months. It may not happen this month. But I think 2 out of the next 3 CPI prints could get an 0.2%-0.3% bump to core above the baseline! Per month!
  • Consensus for today’s release is 0.21%-0.25% or so on core CPI, which is in line with the year-ago number and with what had been the trend prior to Covid.
  • This again seems low, if only because we still have Covid-categories to recover and the Used Cars effect to anticipate. But there are two downside risks too.
  • The first is that many colleges – though not all – have cut tuitions this year as they go partly or entirely virtual. The adjustment happens once/year, right around now. The BLS is not making a quality adjustment so this could show up as a drop, or at least a below-trend rise.
  • The risk with the bigger weight is in rents (and OER). Up until last month, rent delinquencies had been approximately normal but delinquencies have been rising a bit lately.
  • Although QUOTED rents themselves have been rising outside of big cities, the BLS adjusts rents downward based on a landlord’s assessment of the likelihood of eventually receiving all of the rent. And those assessments are likely weakening.
  • So, this COULD produce a weak rents reading. It’s still a smallish difference in delinquencies, and home prices are doing well, so it isn’t a big longer-term effect I don’t think. Unless cities make it harder on landlords to collect rent.
  • So overall I think the forecasts seem conservative, but unlike last month there ARE some downside risks too. And, to be sure, the Fed doesn’t care about #inflation at all right now. See my very short summary of Average-Inflation Targeting here: Average-Inflation Targeting, In a Nutshell
  • Anyway, that’s the walkup. Good luck. If you have interest in talking to us about how to hedge/invest in the inflationary period approaching, visit
  • Wellllllll I hate to say I told you so, but I told you so. Actually so did Druckenmiller. Did you see where he said we could see 5-10% inflation? Yikes.
  • Core #CPI prints at +0.39%, raising y/y to 1.73%.

  • So core prices rose 1%, that’s an annualized 6%, over the last two months. But the good news is that you haven’t yet missed the trade. Inflation markets still have very low opinions of inflation going forward.

  • CPI for Used Cars and Trucks rose 5.4% m/m. That’s part of it. It increases the y/y for that category to 3.98% from -0.89%.
  • Again, the used cars move isn’t surprising. And there’s more to come, as this chart makes plain.

  • Now, Core Services as a whole fell to 2.2% y/y from 2.3%. That’s largely because Primary Rents rose only 0.09% m/m, which brings the y/y down to 2.95% from 3.12%. OER rose only 0.12%, pushing y/y to 2.69% from 2.80%.
  • I noted that potential issue at the top. What’s amazing is that even with that slowdown – driven by rental delinquencies, and temporary given what’s happening to home prices – core inflation was STILL +0.4%.
  • That means core-ex-shelter rose to 1.32% y/y. That’s up almost 1% from two months ago. Still low.
  • Lodging Away from Home was +0.95% m/m, after +1.19% last month. That still keeps the y/y at -11.4%. So, in a nutshell, that covid-category still has “potential energy.” Apparel was +0.62% m/m, but y/y is still -5.88%, so same deal.
  • Pharmaceuticals (“Medicinal Drugs”) rose +0.34% m/m, but that still drags down the y/y slightly. Doctors’ Services and Hospital Services didn’t repeat last month’s sharp rise, but they’re still rising.
  • Overall, Medical Care was soft, partly because Health Insurance is finally slowing a little bit. And we’ll pause here for a 9/11 observance.
  • So macro-wise, what’s interesting about this number is that the big honker of rents softened but we are starting to get RIGHT tails. So Median will likely be softer than Core again.
  • So, college tuition and fees decelerated to 1.31% from 2.09%. That’s the smallest increase in generations. Importantly, it’s because they’re not quality-adjusting education; if they were, this would be a huge rise.

  • The BLS looked at adjusting for quality in tuitions, but decided it’s too difficult esp if this is a passing effect. If it’s not, then they’ll have to look more deeply at it. But if next year is normal, this drop will be reversed and then some. COSTS of colleges are rising.
  • I mentioned earlier the fact that core goods inflation was positive y/y, largely on the strength of cars. This is close to the prior trend, but judging from lagged import prices possibly unsustainable.

  • However, the softness in shelter is probably also not sustainable. Even just focusing on rents (and not lodging away from home), the underlying trends are just not suggesting the recent deceleration is the start of something bigger.

  • Again, home prices are doing fine, and home prices and rentals are substitutes. They don’t diverge for long. The eviction-stay orders are probably contributing to delinquencies, which pulls down measured rents.
  • So here are the four-pieces charts, which are telling some interesting stories at the moment. First, Food & Energy.

  • Piece 2: Core goods. Sharp higher on cars. We have more of the cars effect, but then some softness perhaps. But in the big picture, it’s hard to imagine this staying weak with trade frictions.

  • Core Services less Rent of Shelter. Has bounced back, but Medical Care hasn’t really seen the strong uptrend I would have expected in the wake of COVID. Maybe that waits until after COVID.

  • Piece 4: Rent of Shelter, the piece that ordinarily moves the slowest. It looks dramatic, but again a lot of that is lodging away from home. But rents and OER also softening. Consider me a big skeptic that we’re about to see this decelerate in a lasting way.

  • OK, here’s something interesting. First chart is distribution of y/y price changes by category. Still some left tail but it’s starting to spread out. So for the second chart…

  • This chart shows the distribution of price changes, ex-rents. The rent categories are huge, and when they are both between 2.5% and 3.0% it is hard to see the underlying distribution. This is interesting because it’s all over the place.

  • The median of that last picture is between 2.0% and 2.5%, so it isn’t as if rents are totally changing the picture, especially now as the left tails diminish and we start to pick up some right tails.
  • So to repeat one thing I said up top, to sum up: the Fed doesn’t give two pence for any of this. The move to AIT makes official policy what was unofficial, that they’re going to ignore inflation until it’s really hot.
  • I think there’s a good chance they get their wish. I haven’t mentioned at all today the crazy explosion in the money supply. Yes, it is slowing a LITTLE, but the last 13 weeks it’s still rising at 11% so that’s hardly tight money.

  • Unless something dramatic changes in the next couple of weeks, the Q3 average of M2 will be ~4% above (16% annualized) the Q2 average.
  • Money velocity in Q3 will be up, compared to Q2. The models on this are wild, but right now looks like 1.105 compared to 1.097 in Q2. That’s enough, with that money growth, to support the real growth AND a rise in prices. And that’s why we’re seeing prices rise.
  • …Don’t even ask about Q4 if we continue at this pace of money growth. It’s worth listening to Druckenmiller and other smart people who remember past inflation episodes. Inflation is not dead – not when monetary and fiscal authorities are misbehaving. And misbehaving they are.
  • That’s all for me today. Will be interesting to see if forecasts for Core CPI next month are still 0.2%, or if expectations increase. Again, this happened today EVEN THOUGH rents slowed. By the way, at this hour 10-year breakevens are…LOWER. Plenty of time to board the train!

So we have a second month of inflation ‘surprising’ to the upside. Let’s think about how the forecasters got to their 0.2% guesses, and what went wrong. Any economist worth his or her salt knows that used cars was going to contribute to core inflation this month and next, although it might have been one more month of lag. And the softening in rents, due to delinquencies, was again not super-surprising. But they’re not worth the same. The 5.4% rise in Used Car prices m/m is worth about 0.17% on core CPI, while the deceleration in Rents from 0.23% per month to 0.11% per month is worth only about 0.05% on core CPI.

The easiest way to get to a m/m forecast of +0.22%, then, is to believe one of three things. Either you thought Used Car prices weren’t really going to reflect the private surveys (but as the chart above illustrates, there’s a very tight correlation), or you thought that rents were going to completely fall out of bed and actually decline month/month, or you correctly forecast those numbers but put the net on top of a much lower trend assumption. That is, if you thought that the real underlying trend is more like 0.1% per month on core inflation, then you could get 0.1% + 0.17% (cars) – 0.05% (rents) and get to +0.22%.

That’s not implausible – most forecasters, being Keynesians, are thoroughly convinced that we can’t possibly have inflation with such a large output gap.

(Yes, there’s a fourth way to get that number, and that’s to have identified something else that one thought was going to be an outlier – maybe a better recovery in Lodging Away from Home or Airfares, for example. But I don’t think that was the cause in most cases).

It will be interesting to see how long economists insist on being surprised in this way. At some point, forecasters start to correct persistent misses. But the fact that inflation markets themselves are still demonstrating a hard disbelief that inflation can exceed the Fed’s target for long means there is a deep wellspring of skepticism in the investing and economist communities. There’s still time to get inexpensive inflation protection. On the flip side, investors who do not start to invest in at least some ‘inflation insurance’ will have a harder and harder time explaining why. They can’t lean on “we were all surprised, but the markets adjusted too quickly.” They haven’t! But they will.

There’s still time. But the time is getting shorter.

Categories: CPI, Tweet Summary Tags:

Summary of My Post-CPI Tweets (August 2020)

August 12, 2020 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, issuers and risk managers with interests in this area be sure to stop by Enduring Investments!

  • Well, it’s CPI day and I have to tell you I’m looking forward to this one and I’ll tell you why.
  • Used cars! The Black Book retention index jumped about 9% last month after 8.5% the prior month. There’s typically a 3-month lag before it gets into CPI, but w/ a big move it’s harder to say. Each of those jumps would be worth about 0.3% on core, and we have two of them coming.

  • That being said, (a) there is still one dip we haven’t seen yet so we COULD have a dip in used cars this month. It would be surprising, but it would mean we can prep for a couple of really good numbers. So I’m excited either way.
  • And it’s not just used cars. Now that things are opening up, we’re going to see pressures in other places. Medical care started to show some ups last month and I expect that to continue as hospitals are hurting for revenue.
  • Last month we also saw strong apparel, lodging away from home, and airfares, which were rebounding from the covid-induced swoon. I think that could continue, and it’s an interesting story line to watch.
  • On the other hand – this is next month’s story but college tuitions are likely to decline this year because colleges are giving discounts. Even though the product has changed in quality (e-learning not the same as in-person), the BLS has decided it can’t quality-adjust easily.
  • So CPI for college-tuition-and-fees – again, probably next month – will fall and then rebound hard next year. So that’s fun. It’s not right, but it’s okay, as the saying goes.
  • Shelter last month, ex-hotels, was soft. That’s the only fly in the inflationary ointment, but it’s a big one. So far it doesn’t look like rents are likely to decelerate much overall, nor housing prices fall – but if they do, that’s a big deal.
  • I will be looking at core-ex-housing to see if pressures are broadening, but looking at shelter b/c it’s a big, slow item. If shelter weakens appreciably, it will be news – historically, with the last recession being an exception, housing prices and rents almost never FALL.
  • But they can slow, and with incomes sketchy housing inflation probably SHOULD slow. If it doesn’t, that’s a real sign that the rising monetary tide is raising all assets. (And goods and services). FWIW, wages also aren’t slowing. Atlanta Fed wages are +3.8% y/y.
  • (There’s interesting stuff around the disconnect between wages and the unemployment rate right now, but I’ll save that for a blog post another time. Not really a CPI-day thing.)
  • Consensus today is for 0.2% on core CPI, but a soft 0.2% with y/y falling to 1.1%. I think there’s lots of upside to that if Used Cars pops, but a little downside if shelter is weak again. I’m in the “probably higher” camp.
  • Good luck! And if you’re curious about what an inflation guy does when it’s not CPI day, stop by Enduring Investments:
  • Oh, yes.
  • I don’t think we need to worry much about the rounding this month. Core +0.6% m/m; y/y to 1.6% when it was expected to drop to 1.1%.
  • FWIW, that was rounded down. +0.62% m/m on core. Repeat: rounded down. I will have to check but that is the biggest monthly figure in decades.
  • I think I soiled myself.
  • There are going to be a lot of crazy charts like this one this month. This is the last 12 core CPI prints.

  • y/y core rose from 1.19% to 1.57%, in one month. Core goods were -1.10% y/y; now they are -0.5%. Core services were 1.90%; now they’re 2.3%.
  • Take that Keynesians. WHERE’S YOUR OUTPUT GAP MODEL NOW? …but I shouldn’t celebrate. All of those degrees…and poor Nomura forecasting outright deflation…
  • Now interestingly, Used Cars and Trucks was up, 2.33% m/m, but that’s not the big jump yet. (!)

  • Lodging Away from Home, another COVID-casualty, was +1.2% m/m. Same as last month. But the y/y is still -13.26% (was -13.92%).
  • Primary rents rebounded some, +0.19% vs +0.12% last month, and OER as well +0.21% from +0.09%. Those are m/m numbers, and the y/y are still softening though: 3.12% for primary rents and 2.80% for OER, down from 3.22%/2.84%. But not collapsing.
  • OK, I said I was going to be interested in core-ex-housing. It jumped from 0.35% y/y to +1.01% y/y. Now, that’s only the highest since March but again: the deflation dragon, if not slain, is pretty sick.
  • Apparel was +1.08% m/m, but y/y is still -6.4% (was -7.2%). Like the other belly-flop categories, there’s still a lot of recovery to come.
  • So how are the doctors doing? Medical Care was +0.41% m/m, but that actually dropped the y/y slightly to 5.02% from 5.08%. However, that’s mostly because Pharma remains weak.
  • CPI for Medicinal Drugs was flat again. +0.02% this month; -0.01% last month. The y/y is down to 1.1%.

  • But Physicians’ Services up to 2.58% y/y (up 0.67% this month)

  • And hospital services hanging out at around 5% y/y. Look, like many services these are all becoming more labor-intensive and that means…more expensive. Some of that might come back, some day.

  • Totally forgot airfares: +5.4% m/m after +2.6% m/m last month. But still down a lot from the peak. Here’s the y/y figure.

  • And a quick check of the markets: 10-year breakevens +3.5bps, kinda surprised it’s not more. 5y breakevens +5bps. Some of this might just be time for price discovery. I know when I was a CPI swaps dealer, it took some time before we knew wth was the right price.
  • BTW that core increase was the biggest monthly increase since 1991. That predates TIPS by 6 years.
  • Now, college tuition and fees rose to 2.09% y/y from 1.74% y/y. That’s interesting, as that serious ought to be declining next month. And for tuitions, that’s a largeish m/m change. Interesting.
  • Let’s see. Biggest m/m declines: misc personal goods (-41.7% annualized) and meats, poultry, fish & eggs (-36.9%, but it had been up a lot too).
  • The list of gains annualizing more than 10% has 14 categories. Includes motor vehicle insurance, car/truck rental, public transportation, used cars/trucks, communication, jewelry, footwear, lodging away from home…
  • Now, those who live by Median CPI ought to also die by Median CPI. I’ll convert you all, eventually. Median this month will be something like +0.21%, because it ignores the upside long tails like it did the downside ones. y/y will actually decline to 2.56%
  • The message there is just that the underlying trends are pretty stable. But it’s not insignificant that the tails shifted to the right side from the left side. As I’ve said before, that’s sort of what infl looks like in practice, just as disinflation has one-offs to the left.
  • Health insurance y/y is a little softer, down to 18.7% y/y from 19.4%. So we got that going for us.

  • This is the distribution of y/y changes in the CPI. There’s still a big left tail anchor which is why core is below median. But this is a much more balanced distribution than it has been in a while.

  • And here’s the weight of categories going up by more than 2.5% y/y. The weight is the highest since July 2008.

  • That doesn’t look very deflationary to me.
  • Putting together the four-pieces charts and then I’ll wrap up.
  • Piece 1 – food and energy. With all of the wild swings, it’s net-net kinda boring.

  • Piece 2, core goods. This was the piece that was getting a wind behind it because of trade frictions when the crisis hit. Big bounce this month. Much of that is autos, but as I pointed out early: the BIG jump in car prices hasn’t hit the data yet.

  • Piece 3, core services less rent of shelter. Also a big recovery, and some of this is airfares. Some also is medical care. But there are a number of other categories contributing here. Still kind of trendless last 5y, overall.

  • Piece 4, the biggest and slowest piece, and looks scary. Until you remember this includes hotels (lodging away from home). If you take that out, shelter has decelerated some but not a lot, and certainly not in a disturbing way like this appears. Don’t project this!

  • OK to sum up. I saw someone call this a “noisy” report. Well, only in the sense of clanging cymbals. The data here all swung in one direction – but there really weren’t a lot of surprises, per se. The only surprise was the synchony of the surprises to one side.
  • As I said up top, we still have a couple of +0.3% boosts (maybe +0.2% if we’re ahead of mode) coming from used cars. And a lot of the beaten-down categories haven’t really recovered (apparel, etc) fully.
  • THAT’S what’s surprising. This wasn’t the left tail snapping back, much. This was a much broader advance than the decline had been. The decline had been 4 categories: lodging AFH, used cars, airfares, apparel. Way more here.
  • There are lots of bumps ahead, including the question of whether home prices and rents decelerate when and if incomes decline. We aren’t seeing that yet. And with M2 growing at 23% per year, it’s hard to believe asset prices can decline very much. Including housing.
  • The fun thing to think about is: what is happening at the Fed today? Are they clapping wildly, that they succeeded in pushing prices up? Or are they somber, wondering if they might have overdone it? Or are they focusing on median CPI and saying, meh?
  • My guess is that there’s a bit of nervousness. The Fed wants to overshoot 2%, but they don’t want to put it at 6%. I’ve said for a long time: creating inflation is easy. Creating A LITTLE inflation is hard.
  • Well, that was fun. Thanks for tuning in. I’ll put a summary on my blog relatively shortly. Again, if today’s number makes you think ‘hey, maybe we should talk to an inflation guy and see if he can help us’, stop by our website: Have a nice day.

I don’t know whether to be exhausted or energized. I think I’ll go with energized, because this is not likely to be the last surprise in inflation prints. We are entering a period, not only of higher inflation (probably), but also much higher inflation volatility. That’s important, because a key underpinning of the valuation argument for stocks and bonds is that inflation is not only low, it’s low and stable and therefore can be ignored in calculations. But if inflation is volatile, and especially if it’s high and volatile, then  companies and investors need to include it in their calculus. And if the inflation factor ends up becoming significant again, after more than a decade of irrelevance, then it means that (a) stocks and bonds will become increasingly correlated and (b) stock and bond valuations will be lower.

Now, I don’t know if the markets really understand what’s going on. In fact, this number was so outside of expectations I think that investors just dismissed it as a one-off, like April’s number. But it’s not. This was not just a snapback of the depressed categories; indeed, most of the categories that were depressed because of Covid (lodging away from home, airfares, e.g.) are still depressed although they’ve rebounded a little. This was much broader than that. But investors have pushed 10-year breakevens up only 3-4bps, to 1.66%. Stocks are soaring, and 10-year nominal yields are a mere 3.5bps higher. Commodities are flat. Gold, after a bloodbath yesterday, is flat today. The only way those reactions make sense is if investors are missing the significance.

When the unemployment rate shoots higher, then you can understand a positive market reaction because investors have come to count on the Fed supporting markets in that circumstance. But that reasoning doesn’t make sense here. Nothing about a 7.2% annualized rate of inflation (0.6% * 12) would make the Fed eager to add more liquidity. Ergo, it must be that investors just don’t care about the inflation numbers, or they think this is a random miss.

They should care. This isn’t a one-standard-deviation miss; it’s the biggest monthly print in thirty years and there was no big outlier. While it doesn’t guarantee that inflation is heading higher, the question is whether this print is consistent with our a priori model of the world.

If you’re a Keynesian, the answer is absolutely not. So economists who are output-gap focused are going to say that this number doesn’t matter; it’s ‘quirky’ or ‘noisy’ or ‘measurement error’; the output gap is going to drag down inflation. Maybe that’s why investors are nonchalant about this…because they’re being told by the bow-tie set to look through it.

But if you’re a monetarist, this is entirely consistent with your a priori model. The only surprising thing about this is that it is happening so soon. I was thinking we would see inflation rise starting in Q4 and it would get messy in 2021. I might have to move up the timetable. Because this number is entirely consistent with my model, I’m much less sanguine. This might be only the first shot over the bow… Indeed, over the next several months I can say that since we are confident that used car prices are going to add a lot to core inflation, we will probably have at least one or two more prints of 0.4%-0.5% on core over the next three months. If we get 0.4%, 0.2%, 0.4%, then in three months core CPI will be back to 2.25% y/y, and that with unemployment still in the high-single or low-double-digits. And it could actually be worse than that. Without home prices collapsing, it’s hard to see it being much better than that and absolutely no way to see how prices (or even the inflation rate) could be lower than that unless something really, really weird happens.

Well, 2020 is the year of really, really weird so I suppose I will never say never. But inflation hedges remain super cheap; if you’ve been waiting to scoop them up I can’t see any argument for waiting any more.

Summary of My Post-CPI Tweets (July 2020)

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, issuers and risk managers with interests in this area be sure to stop by Enduring Investments!

  • Welcome to CPI day from the Rocky Mountains! Inflation indicators are getting more and more important these days, and today’s number will be interesting as always.
  • First, let me mention that I will be on @TDANetwork with @OJRenick today at 9:15ET to discuss the CPI and other inflation items. Tune in!
  • In this month’s CPI, we will probably continue to see some of the data collection issues from the last few months, but fewer. As the US has opened back up, the readings should start being cleaner. So the volatility we see will start to represent actual volatility in pricing.
  • I think we should continue to be cognizant of the underlying context, and that is that M2 growth in the US is at all-time records. Can we have 23% money growth and no inflation?

  • Keynesians would say yes – in fact, with the massive output gap, we should be in outright deflation. There may be some nuance (inflation anchoring keeps it from happening immediately), but the sign is clear.
  • Monetarists would say that after velocity corrects the unusual, huge precautionary demand for cash balances (lowering velocity), we should see problematic inflation. How much? Hard to say, but I’ll say I’m not aware of a society that has had 20% m2 growth and NOT had inflation.
  • So far, the monetarists are winning. While core inflation has dipped the last few months, it’s all in the ‘left tail’ of the distribution: used cars, airfares, lodging away from home, and apparel account for it all. Median inflation has barely budged.
  • So the story going forward is that we are going to eventually see a bounce in those tail items, so if we’re going to get deflation we need to see broader deceleration in prices.
  • The consensus today is for 0.1 m/m on the core CPI. That seems low to me. Unless something weird happens with primary rents and OER and they start to slow markedly, any rebound in those tail items is going to take inflation up. But we will see, in just a few minutes. Good luck!
  • Higher than expected core: +0.19% m/m, +1.19% y/y. As I noted up top, that’s not super surprising actually.

  • Sorry – erratum: seasonally adjusted core was +0.235, not 0.19%. So almost gave us a double-tick surprise.
    • In some of the unusuals from past months, yes we’re seeing corrections: Airfares +2.60% m/m (last month -4.88%); Lodging Away from Home +1.21% (last month -1.53%). Used Cars still soft, -1.19%. That’s actually surprising.
  • I suppose it is just in the lag, but used car prices rebounded in a major way in the private surveys (see chart). the Black Book index is higher than before Covid.

  • Interestingly, the upside core surprise happened DESPITE softness in primary rents (+0.12%, 3.22% y/y vs 3.48%) and OER (+0.09%, 2.84% y/y vs 3.06%)
  • Seeing strength in medical care, not surprisingly. That’s been hard to survey over the last couple of months. Doctors +0.45% m/m, 2.10% y/y (was 1.80); Hospitals +0.37% m/m, 5.29% y/y (was 4.86%) Pharma still soft, flat this mo but y/y up to 1.38% vs 0.97%
  • Forgot to mention Apparel, that other one-off. +1.66% this month, though still down hard y/y.
  • Hospital Services y/y

  • Core ex-housing rose slightly, to +0.35% y/y from +0.29% y/y. Still very low, but I suspect the lows are in.
  • Although this is an upside surprise, core still fell vs last month on a y/y basis because we rolled off a +0.28% from last June. Core goods were -1.1% vs -1.0% last month, core services +1.9% vs +2.0% last month (y/y). So there’s still some downward pressure. But it’s turning.
  • I’m afraid this is going to be abbreviated this month as I need to go get ready for @TDANetwork. I’ll be on at about 9:15 ET. Later I’ll update the four-pieces charts.
  • Bottom-lining it: the monetarists win another round as the broad deflation Keynesians would predict is nowhere in evidence. Some of the one-offs are correcting. We do need to keep an eye on the softening in rents.
  • NONE of this will bother the Fed yet…I doubt any of them got out of bed for this number. Thanks for tuning in!

Today’s CPI examination is somewhat abbreviated as I am on ‘vacation’ and my inspection of the report was interrupted by my TDA Network appearance. We’ll be back to normal-length next month. The basic story for the June CPI core inflation figure is a bit of a return to the mean, with most of the left-tail items (with the exception, only temporary, of used cars) rising and retracing some of the dramatic declines we saw in March, April, and May and at the same time a bit of softening of rents. I think the rental softness is also temporary, and tied to a lack of traffic over the last few months – but that’s the only potential fly in the ointment.

The takeaway for this month is really provided by the chart of the last 12 months’ core CPI print, the second one above. Heading into COVID, core CPI was printing around 0.2%-0.25% fairly consistently. March, April, and May were deep exceptions, but June is back to the former trend. To be fair, median CPI this month was very low, at +0.12% m/m and “only” 2.60% y/y. That deceleration was tied to softness in South and West regional Owners’ Equivalent Rent indices, which as I said would surprise me if it was repeated. Rents had recently retreated to our model, and have now slipped below (see chart below).

So, is a dramatic acceleration in inflation evident in the data? Not yet, although the acceleration in M2, coupled with my conviction that the precautionary demand for cash balances will eventually relax, makes me confident that we will see that in the quarters to come. But if we can’t say that breakout inflation is here, neither can we say that there is the least sign of deflation in these figures. Again, if the Keynesians are right, then the huge output gap means that aggregate demand will be insufficient to keep prices up, and deflation will ensue. In the Keynesian world, the only reason this hasn’t happened yet is that inflation expectations are well-anchored or, in other words, merchants haven’t caught on yet that they can’t charge what they were previously charging. In the monetarist mindset, the fact that there is far more money in bank accounts than there was just a few months ago means that eventually the nominal price of goods will be bid up since the price is after all just an exchange rate (of dollars for stuff), and when there are many more dollars then the price of those dollars declines (the price of stuff rises). The reason inflation hasn’t happened yet, according to this view, is that people are clutching nervously onto those cash balances, rather than spending it.

But there are signs that nervousness is ebbing – such as in the price of automobiles and many online goods. If the country lurches back into lockdowns, and the recovery turns back into a deeper recession, then that nervousness may continue for longer. American consumers, though, suck at saving and big cash balances and high savings rates are not usually persistent.

Categories: CPI, Tweet Summary
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