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Summary of My Post-CPI Tweets (June 2017)

June 14, 2017 1 comment

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Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • CPI day! People looking past CPI at 8:30 but…not me!
  • Last 2 CPI prints were very low. The first was a 1-off wireless telecom debacle, read about that effect here.
  • Last month’s CPI weakness was in core services – in medical care & rent of shelter. Harder to ignore but unlikely to be in freefall.
  • Consensus core CPI is for another weak print, only 0.16% or so. Economists believe disinflation is upon us. I think that’s premature.
  • Last May’s core CPI was 0.21%, so that’s the hurdle to get acceleration in y/y figures.
  • WOW! At this rate I will have to change my Twitter handle. Each month is more shocking. m/m core 0.1%, not sure on the rounding yet.
  • 06% m/m on core CPI, so again incredibly weak. y/y at 1.74%, producing the scary optic of a drop from 1.9% to 1.7% on the rounded core
  • This is an amazing chart.

  • waiting for the data dump, but housing, medical care, apparel subcomponents all decelerated.
  • So the upshot is…core prices overall are unchanged from February. That’s right, 0% core inflation over 3 months.
  • Yes, it was telecom that made 0% possible and that won’t be repeated. But still striking. Here is the index itself.

  • So Dec, Jan, Feb core inflation is rising at a 3% annualized pace. next 3 months, zero. That’s not supposed to happen to core.
  • Breakdown now. In Housing, Primary rents remain solid at 3.85% y/y, unch. But Owners’ Equiv plunged (for it) to 3.25% from 3.39%.
  • Picture of OER: this is a dramatic shift in this index, and frankly hard to explain given home price increases.

  • Medical Care decelerated to 2.66% from 2.95%. But w/in MC, drugs rose to 3.34% vs 2.62%. Professional svcs flopped to 1.00% from 1.58%
  • CPI/Med Care/Professional Services, y/y. Doctors suddenly don’t need to be paid.

  • Apparel had been at 0.45% y/y, fell to -0.94%.
  • The Fed funds rate is too low and almost certainly rises today. But with a sudden zig in CPI…it wouldn’t SHOCK me if they delayed.
  • Back to housing – we’ve believed OER was ahead of itself for awhile. Adjustment is just really sudden.

  • in the biggest-pieces breakdown, core goods is at -0.8% y/y while core services is down to 2.6%.
  • US$’s recent decline (2y change in trade-weighted $ is only +7%) means core goods are losing the downward pressure of last few yrs.
  • But the dollar’s effect is lagged significantly. We’re still seeing effect of prior strength.

  • Here are the four pieces of CPI, most volatile to least. Starting with Food & Energy (21% of CPI)

  • Core goods (33%)

  • Core services less Rent of Shelter. Yipe!

  • Got my percentages wrong. Food & Energy is 21%. Core goods is 19%, core services less ROS is 27%. Rent of Shelter is 33%.
  • Rent of Shelter. 27% of overall CPI. I still find it hard to believe this is going to collapse, but as I tweeted earlier it was ahead.

  • My early estimate of Median CPI is 0.18% m/m, 2.28% y/y down from 2.37%.
  • One thing to keep in mind is that in June and July we drop off 0.15% and 0.13% from y/y core. So core should bounce back some. (??)
  • I mean, we can’t average 0% core going forward, right?!? Otherwise @TheStalwart and @adsteel will never have me on again.
  • core ex-shelter down to 0.59% y/y. Lowest since JANUARY 2004!

  • Interestingly, the weight of categories inflating more than 3% remains high. The pullback is in the far left tail.

Well, it’s getting harder to put lipstick on this pig. The telecom-induced drop of a couple of months ago was clearly a one-off. But the slowdown in owners’-equivalent rents is merely putting it back in line with our model, and so it’s hard to believe that’s going to be reversed. And I’m really, really skeptical that there has been an abrupt collapse in the rate of increase of doctors’ wages.

Except, what if there is a shift happening from higher-priced doctors to lower-priced doctors? This sort of compositional shift happens all the time in the data and it’s devilishly hard to tease out – for example, in the Existing Home Sales report it is sometimes difficult to tell if a change in home prices is coming from a broad change in home prices, or because more high-priced or low-priced homes are being sold this month, skewing the average. So this kind of composition shift is possible, in which case each individual doctor could see his wages increasing while the average declines due to the composition effect. I have no idea if this is what is happening – I’m just making the point that if it is, then this effect could be more persistent and not the one-off that the telecom change was. However, I am skeptical.

I do not believe that we have seen a turn in the inflation cycle. With money growth persistently above 6%, it would take a further collapse in money velocity from already-record-low levels to get that to happen. Forget about the micro question, about whether movements in this index or that index look like they’re rolling over. The macro question is that it is hard to get disinflation if there’s too much money sloshing around, whether or not the economy is growing.

But that being said, the Fed doesn’t necessarily believe that. There is a tendency to believe one’s own fable, and the fable the FOMC tells itself is that raising interest rates causes growth to slow and inflation to decline. Although the effect is spurious, we are currently seeing somewhat slower growth (for example, in the recent slowing of payrolls) and we are seeing lower core inflation. It is a low hurdle for the Fed to believe that their policy moves are an important part of the cause of these effects. Of course, they’re not – the tiny changes the FOMC has made in the overnight rate, even if it had been propagated to significant changes in longer rates – which it hasn’t been – or resulted in slower month growth – it hasn’t, especially if you look globally – would not have had much effect at all. But that won’t stop them from thinking so. Ergo, the chance that the Fed skips today’s meeting, while small, are non-zero. And there is a much greater chance that the “dot plot” shifts lower as dovish members of the Fed (and that’s most of them) back away from the feeble pace of increases they’d been anticipating.

Summary of My Post-CPI Tweets (May 2017)

May 12, 2017 4 comments

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

This month, I am making sure to include my comments before the actual number, since my suspicions about the upside risk were exquisitely wrong. This is why you shouldn’t put a lot of weight on monthly figures, folks!

  • Step right up ladies and gents. The CPI circus is about to commence.
  • Last month’s circus crazier than usual, including an unprecedented (and inexplicable) 11+% drop in wireless telecom services. [Editor’s note: it was only 7%. I corrected this in a later tweet]
  • This caused more diversion in core and median CPI. Median (better measure) remains steady at 2.5%.

  • PPI y’day was broadly strong. I don’t pay much attention to PPI but it does create upside risk.
  • Also note that European inflation saw a drop and then big jump from the early Easter. Not sure we have an analog but…
  • Point is that consensus is for 0.17% or so. There’s a lot of upside risk to that number I think.
  • Over next few months, core will rise regardless as we drop off 0.18, 0.21, 0.15, and 0.13. Easy hurdles.
  • Wow! Core only 0.1% again! Even a low 0.1%…0.07%.
  • I cannot WAIT to get a look at the breakdown.
  • ..Medical Care ebbed from 3.5% y/y to 3.0% y/y, wanna look inside that one. Recreation and yes, communication also soft.
  • Core drops to 1.89% y/y. Lowest since late 2015. Of course, remember that median is a better measure – we’ll see that later.
  • [I retweeted this, look at Matthew’s yellow line here]

  • Wireless telecom services fell another 1.7%. Incidentally I earlier said 11% m/m was last mo…it was only 7% m/m, the 11% decline was y/y.
  • so wireless telecom services now down 12.9% y/y, 9.9% over the last 3 months. This really warrants explanation from BLS.
  • In Medical Care, Medical Drugs fell to 2.62% from 3.97% y/y. Professional svcs, which is twice the weight, fell to 1.58% from 2.50%.
  • Health insurance fell to 2.72% vs 3.34%. Lowest since 2015.
  • Medical decel seems implausible but remember is a rate of change measure. So rising from high level, but at slower rate, is lower CPI.
  • Let’s get to housing. Primary rents 3.84% vs 3.88%. OER fell to 3.39% from 3.49%, that’s a big drop for 25% of the index.
  • So overall, Housing rose from 3.1% to 3.2%, but that’s on the strength of a 1% rise in household energy y/y.
  • This is OER. The decline is actually welcome – it had been running well ahead of even our optimistic models.

  • Core goods steady at -0.6% y/y. So the deceleration in last two months is all from core services, from 3.1% to 2.9% to 2.7%.
  • I don’t see that slowdown in core services as sustainable unless housing rolls over…
  • …and I don’t see that happening while home prices keep rising at 6-7% as they have been.
  • Weakness in services outside of housing s/b taken with grain of salt though…a lot of that is wireless services!
  • But doing core-less-housing-and-wireless is cheating. We take out housing to look @ the wiggly stuff. Can’t also take out wiggly stuff.
  • OK, four-pieces CPI look. From most-wiggly to least. They tell the story. Food & Energy:

  • Core goods (about 19% of CPI)

  • Core services less rent-of-shelter (26% of CPI). <<BOOM>>

  • And Rent of Shelter (33.3%)

  • And within core services less ROS, a lot of that is wireless but medical care ebbing is also in there. That’s the story of this month.
  • On Median…I have 0.13% m/m, but the median category is an OER piece and the BLS seasonally adjusts those.
  • But my best guess on median is 0.13%, dropping y/y to 2.4%.
  • Maybe I’m wrong and inflation pressures are ebbing after all. You know who else is thinking that? Janet Yellen.
  • Forgot to tweet this chart earlier.

  • Also interesting. Core<median b/c of big weight in left tail. But also starting to be more weight in general left of mode.

  • Last routine chart: the weight of categories inflating faster than 3% is still almost half. It’s that left tail draggin’ stuff down.

It was easy to ignore last month’s negative core print. It was obviously tied to a ridiculous (and still not explained by the BLS) plummet in the price of wireless telecommunications services. A 7% fall, nationwide, in one month, that no one seems to have noticed, is something the BLS really needs to comment on (my best guess is that some data plans got uncapped, and the BLS assumed a large increase in the data taken at zero dollars and therefore a big drop in the price per gig. That’s effectively a hedonic adjustment, and a not unreasonable one if you really saw a dramatic increase in data being taken. Since I have yet to talk to anyone who saw anything that resembled this huge effect, I remain skeptical.) But in any event, it was easy to ignore March’s number released in April.

Now we have two months in a row, and while wireless telecom contributed this month as well, there was also softness in medical care and in owner’s equivalent rent. That’s harder to ignore. And while median CPI was steady after last month’s debacle, it should downtick today.

I don’t think inflation is done rising; I think this is just a pause. But as I said above, I am sure that the decline in core CPI and core PCE will not go unremarked at the next FOMC meeting – the one where they are supposed to hike rates again. I think we’ll learn a lot about the stomach the Fed has for continuing the rate normalization regime by whether they go through with the next hike.

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • Pretty big market day! Importantly, CPI: remember last month was big upside surprise, and driven by unusual suspects – core goods.
  • There’s a decent base effect hurdle today, as last Feb was 0.25% on core CPI. Consensus today is for a very weak 0.2% (almost 0.1%).
  • The consensus forecast clearly says that most economists see last month’s shocking 0.31% on core as one-offs.
  • Consensus expectation is for core to slip back to 2.2% from 2.3%. But then, last month they thought we’d fall to 2.1%.
  • Hurdles get easier next month: March ’16 saw 0.09% core CPI, and then a series of low 0.2s & 0.1s. So core is going up this summer.
  • Here is what I said about last month’s figures: https://mikeashton.wordpress.com/2017/02/15/summary-of-my-post-cpi-tweets-36/
  • 5 mins to CPI. Sources say the headline number is trading 243.34 (which would be -0.04% on headline) in the CPI derivs mkt.
  • core at 0.21%, higher than consensus expectations of 0.15% or so. Keeps y/y at 2.22%, down from 2.26%. But next month is an easy comp.
  • Monthly core CPI prints.

  • I don’t pay much attention to headline but it was a little high, y/y up to 2.74%. Only matters if it affects tenor of Fed discussion.
  • In major subgroups: Housing rose to 3.18% vs 3.12%. Need to see if that’s energy. Apparel fell back, as did health care.
  • w/in housing, Primary Rents slipped to 3.91% from 3.93%, Owner’s Equiv to 3.53% from 3.54%. So the housing bump was elsewhere.
  • Looks like the housing increase was mostly household energy, 4.46% from 3.51%. So no biggie as the kids say.
  • Apparel 0.42% vs 0.99%. The big jump last month was mostly reversed. Overall core services 3.1% and core goods dropped back to -0.5%
  • Last month the big story was that core goods had caused the jump in core CPI. Looks like these were mostly seasonal issues after all.
  • Transportation 6.3% vs 4.8%. That’s mostly gasoline. New & used cars slipped. But rising: parts, maintenance, insurance, airfares.
  • In Medical Care, big drop in medicinal drugs 4.19% vs 4.85%. Also drop in prof svcs (2.68% v 2.94%). THOSE are the one-offs this month.
  • Here are y/y med care & housing, source of the big upward pressure recently. But remember this month the housing is mostly energy.

  • Four more major subcategories. Recreation is the only one moving higher, but it’s a heterogeneous group & hard to decipher.

  • Quick estimate of Median is 0.21% m/m, 2.52% y/y, not quite a new high. Official figure will be out later.
  • Next month we should have core back over 2.3% and a shot at 2.4%, thanks to easy comp in March.
  • 10y inflation swaps still below current median inflation.

  • Mkt pretty confident in Fed: CPI mkt pricing: 2017 2.0%;2018 2.2%;then 2.2%, 2.1%, 2.2%, 2.2%, 2.3%, 2.4%, 2.5%, 2.7%, & 2027:2.5%.
  • This CPI report takes inflation off the boil, but not off the burner.
  • One more chart: weight of CPI categories over 3% inflation y/y.

Let’s face it. While this month’s CPI held some intrigue because of last month’s surprising spike, nothing about the figure was likely to change the outcome of today’s FOMC meeting and probably not the tenor of the statement or post-meeting presser. So, in that sense, this was a much less-significant report than last month’s release.

At the same time…let’s not lose sight of the fact that this was still an above-consensus CPI report. While the consensus was broadly correct that some of the jumps in core goods categories from last month were one-offs, and at least partially retraced this month, it’s still the case that y/y core inflation is going to keep rising through the summer merely on base effects. If the Fed wants to be hawkish and tighten more than the market currently expects (I think that nothing could be further from the truth, with Yellen at the helm, but she seems to dislike President Trump enough that she might forget some of her dovish leanings), then they will continue to have cover from inflation reports for a while.

Going forward from that, there are two inflation questions that will be resolved: (1) Will core goods recover and rise, indicating a broadening of inflation impulses that could produce a longer-tail upside? And (2) will housing inflation flatten out or decline since rent inflation is currently rising faster than even our most-generous models? If it does, then core inflation might stabilize near the current level, or even decline.

I have trouble figuring out what the mechanism would be for inflation to flatten out at these levels, from the macro-monetary perspective. Money growth remains brisk and higher interest rates should eventually goose velocity. I don’t see much prospect of money growth rolling over while banks are neither capital- nor reserve- constrained. And it’s hard to see interest rates heading back down while central banks shift into less-accommodative stances. I have more confidence in the macro-monetary (“top down”) model at longer time frames, and more confidence in the bottom-up analysis at shorter time frames. And for years they’ve told the same story: inflation should be rising, and it has. But there is a conflict between these perspectives that is coming later this year. How it resolves will be the story of the next 3-6 months.

The Fed Needs More Inflation Nerds

January 30, 2017 5 comments

Earlier today I was on Bloomberg<GO> when the PCE inflation figures were released. As usual, it was an enjoyable time even if Alix Steel did call me a ‘big inflation nerd’ or something to that effect.

The topic was, of course, PCE – as well as inflation in general, how the Fed might respond (or not), and what the effect of the new Administration’s policies may be. You can see the main part of the discussion here, although not the part where Alix calls me a nerd. A man has some pride.

My main point regarding the PCE report was that PCE isn’t terribly low, but rather right on the long-run average as the chart below (all charts source Bloomberg) shows. Of course, PCE has been lagging behind the rise in CPI, but because it had been “too tight” previously this isn’t yet abnormal.

spread

However, in the interview I didn’t get to the really nerdy part. Perhaps my ego was still stinging and so I didn’t want to highlight the nerdiness?[1] No matter. The nerdy part is that the reason PCE is low is actually no longer because of Medical Care, but because of housing. This next chart plots the spread of core CPI over core PCE, through last month’s figures, versus Owners’ Equivalent Rent (OER).

vs-housing

Housing has a much higher weight in the CPI than in the PCE, and as you can see the plodding nature of OER means that the correlation is somewhat persistent because housing inflation is somewhat persistent. Right now, OER (which, frankly, I thought would have leveled off by now) is rising and showing no signs of slowing, and this fact has served to widen the CPI-PCE spread back to its historical average and likely will cause it to widen to an above-average level. I suppose the good news there is that it is still true that outside of housing, core inflation is still not rising aggressively. Core services ex-housing are looking perkier, but core goods continue to languish as the dollar remains strong. The strength of the dollar almost beggars belief if it’s true that the rest of the world hates us now, but it is what it is.

The bigger point, for markets, is “so what?” There is nothing about a 1.7% core PCE that presents any urgency for Chairman Yellen. As I said on the program: as Yellen approaches the end of her chairmanship (in January 2018, since she insists Trump won’t chase her out before), I believe it is much more likely that she wants to be remembered for pushing the unemployment rate very low – because she believes inflation is easily controlled – than that she wants to be remembered for being a hawk that stopped inflation from getting going. She isn’t worried about inflation, and so the question is whether she wants to be criticized for adding “too many” jobs, or not adding enough. Not that monetary policy has much to do with that, but I believe she clearly will err on the side of keeping policy too loose. The Fed isn’t tightening this week, and I find it unlikely that they will tighten in March, unless inflation expectations rise considerably further than they have already (see chart of 5y5y inflation forward from CPI swaps, below). Even after the big rally since late last year, 5y5y is well below the long-term average through 2014.

5y5y

And even if inflation expectations do rise further, the excuse from the chair will be easy: expectations are rising because the end (and possible reversal) of the globalization dividend and the imposition of tariffs will lead to higher prices. But there is nothing that Fed policy can do about this – it is a supply-side effect, just as high oil prices due to OPEC production restraints would represent a supply-side effect that the Fed shouldn’t respond to. So the excuses are all there for Dr. Yellen. History will show that she missed a chance to shrink the Fed’s balance sheet and avert the worst of the next inflationary upturn, but that history will not be written for some time.

[1] Ridiculous, of course. I embrace my nerdiness, at least when it comes to inflation.

Categories: CPI, Economy, Federal Reserve Tags:

Summary of My Post-CPI Tweets

January 18, 2017 Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • Last CPI of 2016…fire it up!
  • Core +0.23%, a bit higher than expected. Market was looking for 0.16% or so.
  • y/y core CPI rises to 2.21%. The core print was the second highest since last Feb.
  • For a change, the BLS has the full data files posted so brb with more analysis. Housing subcomponent jumped, looking now.
  • Just saw this. Pretty cool. Our calculator https://www.enduringinvestments.com/calculators/cpi.php … pretty cool too but not updated instantly.
    • BLS-Labor Statistics @BLS_gov: See our interactive graphics on today’s new Consumer Price Index data http://go.usa.gov/x9mMG #CPI #BLSdata #DataViz
  • As I said, housing rose to 3.04% from 2.90% y/y. Primary Rents jumped to 3.96% from 3.88%; OER 3.57% from 3.54%.
  • Household energy was also higher, so some of the housing jump was actually energy. But the rise in primary rents matters.
  • Will come back to that. Apparel y/y slipped back into deflation (dollar effect). Recreation and Education steady. “Other” up a bit.
  • In Medical Care, 4.07% vs 3.98%. That had recently retraced a bit but back on the + side. Drugs, Prof. Svcs, and Hospital Svcs all +
  • Medicinal drugs. Not a new high but maybe the retracement is done.

drugs

  • Core services up to 3.1% from 3.0%; core goods -0.6% vs -0.7%.
  • That’s consistent with our view: stronger USD will keep core goods in or near deflation but it shouldn’t get much worse.
  • The dollar is just not going to cause core deflation in the US. Import/export sector is too small.
  • Core ex-housing rose to 1.20% from 1.12%. Still not exactly alarming!
  • Not from this report, but wages are worrying people and here’s why:

atlfedwages

  • However, wages tend to follow inflation, not lead it. I always add that caveat. But it matters for Fed reaction function.
  • Next few months are the challenge for renewed upward swing in core CPI – Jan and Feb 2016 were both high and drop out of the y/y.

corecpi

  • Early guess at Median CPI, which I think is a better measure of inflation…my back of envelope is 0.24% m/m, 2.61% y/y…new high.
  • CPI in 4 pieces. #1 Food & Energy (about 21%)

fande

  • CPI in 4 pieces. #2 Core Goods (about 20%)

coregoods

  • CPI in 4 pieces. #3 Core Services less Rent of Shelter (about 27%)

coresvcslessros

  • CPI in 4 pieces. #4 Rent of Shelter (about 33%)

ros

  • This is why people are worried re’ inflation AND why people dismiss it. “It’s just housing.” Yeh, but that’s the persistent part.
  • Scary part about rents is that it’s accelerating even above our model, and we have been among the more aggressive forecast.
  • OK, that’s all for this morning. Anyone going to the Inside ETFs conference next week? Look me up.

We end 2016 with the outlook in limbo, at least looking at these charts – unless January and February print 0.3% on core inflation, core CPI will be hanging around 2% for at least the next few months. Median inflation is more worrisome, as it will probably hit a new high when it is reported later today, but it doesn’t get the ink that core CPI or core PCE gets.

To my mind, the underlying trends are still very supportive of a cyclical (secular??) upswing in core inflation. Here’s a summary of two of the pieces that people care about a lot. Housing is much bigger, but slower; Medical Care is more responsive, but smaller.

lastchart

I suspect that chart is enough to keep most consumers jittery with respect to inflation, but as long as retail gasoline prices stay below $3/gallon there won’t be much of an outcry. But that doesn’t matter. M2 money growth accelerated throughout 2016 as the economy improved, and ended the year at 7.6% y/y. Interest rates are rising, which will help push money velocity higher. It’s hard to see how that turns into a disinflationary outcome.

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets

November 17, 2016 Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • CPI consensus is for a “soft” 0.2% on core. With 2 of the last 3 months quite low for one-off reasons, I am a little skeptical.
  • Rolling off an 0.196% m/m core from Oct 2015. Need about 0.23% to get y/y to tick back up to 2.3% on core.
  • Wow, 0.1% m/m on core and y/y goes DOWN to 2.1%! But not as impressive as that. To 3 decimals it’s 0.149% and 2.144%. Still, soft.
  • The doves just got another bullet.
  • Component breakdown very slow coming in….bls hasn’t posted data yet.
  • The overall number doesn’t mean much without the breakdown…still waiting on BLS.
  • Well, this is anticlimactic. BLS just not putting up the data. No data, no analysis.
  • Looks like a sharp fall m/m in some medical care commodities, but BLS report itself only gives 1-decimal rounding and no y/y comparisons.
  • BLS a half hour late now. Wonder if they’re all in “safe spaces” today.
  • Well, I see one reason. Apparently the BLS made an error in prescription drugs and actually revised all of the indices back to May.
  • …including the headline NSA figure. That’s an error with huge implications. It means the Tsy made wrong int payments on some TIPS.
  • NSA was 240.236, 241.038, 240.647, 240.853, and 241.428 for May-Sep. Now 240.229, 241.018, 240.628, 240.849, 241.428
  • Market guys telling me Tsy will use the old numbers for TIPS and derivatives. And hey! Look at that. BLS decided to release figures.
  • Gonna be an interesting breakdown actually. Surge in Housing and jump in Apparel, but plunge in Medical Care, Rec, & Communication.
  • Core services 3% from 3.2% y/y, core goods -0.5% from -0.6%.
  • OK! Housing 2.87% from 2.70%. BIG jump. Apparel 0.68% from -0.09%. Medical 4.26% from 4.89%. All big moves.
  • Primary Rents: 3.79% vs 3.70%; Owners’ Equiv Rent 3.45% vs 3.38%. Lodging away from home 4.37% vs 3.73%. All big jumps.
  • In Apparel (@notayesmansecon ), Women’s 0.27% vs -0.35%, but it was 1.57% 3 months ago. Girls tho: 3.06% vs 1.95%, vs -4.73% 3mo ago.
  • In Med Care: Drugs 5.24% vs 5.38% ok. Med Equip -0.79% vs -0.61% ok. Hospital Svcs 4.06% vs 5.64% !, Health Ins 6.93% vs 8.37% !.
  • Median should be about 0.16%, but median category looks like Midwest Urban OER so there’s seasonal adj I am just estimating.
  • That would keep Median at 2.49%, down from 2.54%. But all this looks temporary.
  • Core ex-housing dropped to 1.20%, lowest since last Nov. But it was as low as 0.87% last year.
  • Here is the summary: Rent of Shelter continues to rise, and actually faster than our traditional model. Services ex-Shelter decelerated.
  • Core goods continues to languish. But here’s the thing: Housing is stickier than the rest of Core Services.
  • So unless somehow hospital prices just started to drop, this isn’t as soothing as the headline.
  • That said, this is the most dovish Fed in history. If the market continues to price 90+% chance of hike, they will…but…
  • …but if we get more weak growth figures, the 2-month moderation in inflation will be enough for them to wait one more meeting.
  • Employment numbr is key. Meanwhile, infl is going to keep rising. Housing worries me. Higher wages might keep housing momentum going.
  • Here are the two categories that constitute 50% of CPI. Housing and Medical Care. Not soothing.

50pct

  • Here’s another 30%. Volatile categories we usually look through.

30pct

  • Last 20% of CPI are these 4 categories. They’re the ones to watch. Nothing too worrisome yet.

20pct

  • Here’s the FRED inflation heat map. Yeah, these were all charts that were SUPPOSED to be in my de-brief.

picture1

  • Compare distributions from last month (smaller bar on far left) and this month (bigger bar on far left).

picture2 picture3

  • More negatives, but some of the longest bar shifted higher too. More dispersion overall.

I keep coming back to the housing number. That jump is disturbing, because most folks expected housing to start decelerating. I thought it would level out too (though at a higher level than others felt – roughly where it is now, 3.5% on OER, but it’s showing no signs of fading). Here’s the reason why. It’s a chart of a model of Owners’ Equivalent Rent:

nominalhsng

This nominal model is simply the average of models based on lags of various measures of home prices. We were supposed to level off and decline some time ago…but certainly by now. And so far there’s no sign of that.

Our model is a bit more sophisticated, but if you rely on lags of nominal variables you’re going to get something like this because housing price increases have leveled off (that is, housing prices are still rising, but they’re rising at a constant, and slightly slower, rate than they were).

Now, here’s the worry. All of these models are calibrated during a time when inflation in general was low, so there’s a real chance that we’re not capturing feedback effects. That is to say, when broad inflation rises it pushes wages up faster, and that tends to support a higher level of housing inflation. We have a pretty coarse model of this feedback loop, and the upshot is that if you model housing inflation as a spread compared to overall or core inflation, rather than as a level, you get different dynamics – and dynamics that are more in tune with what seems to be happening to housing inflation. Now, it’s way too early to say that’s what’s happening here, but with housing at our forecast level and still evidently rising, it’s time to start watching.

*

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Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets

October 18, 2016 Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • CPI coming up in 14 minutes. Consensus on core is for a barely 0.2% print, (more like 0.15%). That would keep the y/y barely at 2.3%.
  • Remember to join me at 9am for a (FREE) live interactive video event at http://events.shindig.com/event/tmenduringinvestments
  • okay, core 0.1%, y/y to 2.2%. Yayy! And by the way it was only 0.11% so not close. y/y to 2.21%.
  • core rate is only 1.8% over last 3 months, vs 2.0% over last 6 and 2.2% over last 9. November tightening is wholly out.
  • Housing accelerated, Medical care roughly unch. Educ/Communication dropped. Getting breakdown now.
  • Headline was also soft. Market was 241.475 bid before the number and 241.428 was the print. Still rounded to 0.3% m/m though.
  • Bonds don’t love this as much as I thought they would. 10y note up about 4 ticks after the data.
  • 10y inflation swaps also didn’t do much. Close to 2% for first time in a long, long time.
  • Primary rents 3.70% from 3.78%, I was reading last month. But OER still up, 3.38% from 3.31%.
  • New and used cars -1.16% vs -0.95%, so more weakness there.
  • In Med care: Drugs 5.38% vs 4.59%, ouch. But prof svcs 3.22% vs 3.35%, and hospitals 5.64% vs 5.81%, and insurance 8.37% vs 9.10%.
  • But those are all retracements within trend.
  • Tuition ebbed to 2.32% vs 2.53%, and “information and info processing” -1.98% vs -0.90%. Those two add up to 7% of CPI.
  • I can see why bonds aren’t super excited. This isn’t a trend change. It looks like a pause.
  • ok, have to go get ready for the video event. See you at http://events.shindig.com/event/tmenduringinvestments … in about 10.
  • Probably good news from Median as well. I see 0.17%, bringing y/y down to 2.54% vs 2.61%. But hsg is median category so I may be off.

I covered some stuff in the Shindig event, but it’s worth showing a couple of charts. Here is health insurance. You can see the little drop this month isn’t exactly something that would make you say “whew! Glad that’s over!”

medins

This next chart, also in medical care, is the year/year change in the cost of medicinal drugs (prescription and non-prescription). Also, not soothing. And these are where the important things are happening in CPI right now.

medicinaldrugs

Finally, the big momma: Owners’ Equivalent Rent. This is not looking like it’s rolling over! And if it’s not rolling over, it’s not likely that inflation overall is rolling over.

oer

In short, the monthly weakness was enough to sooth the Fed and take them off the table for November. And, unless the next figure is really, really bad – like over 0.3% – then they’ll still say “two of the last four are soft.” The December Fed meeting, for what it’s worth, is the day before the CPI is released. The Fed won’t know that number in advance, although nowadays with “nowcasting” they’ll have a clue. But at this point, unless next month’s CPI is very high and/or the Payrolls number is very strong, I think a rate hike in December is also unlikely.

That’s good for markets in the short run. But inflation is rising, and that’s bad for markets in the medium-run!

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