Archive for the ‘Tweet Summary’ Category

Summary of My Post-CPI Tweets

September 16, 2015 Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. And sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All – and How to Invest with it in Mind, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to

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

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

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

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

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

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

Summary of My Post-CPI Tweets

August 19, 2015 2 comments

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. And sign up to receive notice when my book is published! The title of the book is What’s Wrong with Money?: The Biggest Bubble of All – and How to Invest with it in Mind, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to

  • core CPI+0.13%, softer than expected. Core y/y rose from 1.77% to 1.80% due to soft year-ago comparison.
  • Next month we drop off an 0.05%, so we will almost surely get a core uptick. Surprising we haven’t yet. Waiting for breakdn.
  • Both primary rents and owners’ equiv accelerated slightly, Which means core EX HOUSING was actually slightly down m/m
  • core services rose to 2.6% (mostly on housing); core goods fell to -0.5% from -0.4% y/y. Same story overall.
  • Apparel accelerated to -1.64% from -1.85% y/y. Story for years in apparel was deflation; in 2011-12 prices rose>>
  • >>and looked like return to pre-90s rate of rise. Then it flattened off, and has been declining again.
  • Apparel could well be a dollar story now – it’s almost all made overseas, almost no domestic competition so dollar matters.
  • our proxy for core commodities is apparel + cars + med care commodities. all 3 decelerated. Cars went from +0.5% to 0.0% y/y.
  • sorry, Apparel actually ACCELERATED to -1.6% from -1.9%, but still negative.
  • airfares not really a story. -5.6% y/y vs -5.2% y/y. The NSA number dropped but it always drops in late summer. [Ed note: see chart below]
  • airfares was -8.5%, but it was -8.1% last july, -2.9% in 2013, -2.6% in 2012…no story there. didn’t affect core meaningfully.
  • Primary rents 3.56% from 3.53%. OEW 3.00% from 2.95%. Both will continue to rise.
  • Lodging away from home also rebounded to 2.9% y/y after a one-off plunge to 0.8% y/y last month. Household energy of course down.
  • Transportation accelerated (-6.6% y/y vs -6.9%) on small motor fuel recovery. btw, airline fares are only 0.7% of CPI, so 0.9% of core.
  • Med Care: goods were dn (drugs 3.2% vs 3.4%,equipment -0.9% vs 0.0%) but prof services up (2.1% vs 1.8%),hospital svcs dn (3.2% vs 3.5%)
  • Health insurance only +0.9% y/y vs 0.7%, but more expenditures out-of-pocket under the ACA so higher infl for those categories hurts.
  • Median (due out later) might only be +0.1% this month. I have it cuffed at 0.15% but I don’t seasonally-adjust the housing sub-components.
  • Last yr Median was +0.17% m/m, so best guess is it roughly holds steady at 2.3%.
  • I don’t see how the Fed embarks on a meaningful tightening in Sep, with global economy weaker than it has been in a couple yrs.
  • Median inflation and growth plenty strong enough to “normalize” rates but that’s not a new story.
  • I’ve been saying they should tighten for a few years but not sure why they would NOW if they didn’t in 2011.
  • But Fed doesn’t use common sense or monetarist models.It’s all DSGE;who knows what those models are saying?Depends how they calibrated.
  • FWIW our OER models diverge here. Our nominal model says pressures on core start to ebb in a few mo; our real model predicts more rise.
  • I like the real model as it makes mose sense…but it’s not tested in a real upswing.
  • US #Inflation mkt pricing: 2015 0.8%;2016 0.7%;then 1.6%, 1.7%, 1.8%, 1.9%, 2.0%, 2.1%, 2.2%, 2.3%, & 2025:2.2%.
  • …so inflation market doesn’t see inflation at the Fed’s target (about 2.2% on CPI vs 2.0% on PCE) until 2023.
  • The market is not CORRECT about that, but another reason the Fed can defer tightening if they want to. And they have always wanted to.

First, let’s start with the airfares chart. One of the early headlines was that airfares plunged by the most since some long-ago year, which held down core. Well, here is the chart of airfares, non-seasonally adjusted. You tell me whether this is unusual to have airfares fall in July.


Because this is part of a normal seasonal pattern, the year-on-year figure was only slightly lower, as I note above. And airfares are a tiny part of CPI, less than 1% of the core. This is not a story.

More important will be the median CPI. This is a much better measure of the central tendency of prices than headline or core, both of which (as averages) can be skewed by a few categories having outsized moves. Median inflation has been ticking higher (see chart below) but will probably go sideways this month.


Finally, the most important chart. There are lots of ways to model housing. If you model rents as lagged versions of the FHFA Home Price Index, or Existing Home Sales median prices, then you get one model and that model suggests that rents should begin to moderate over the next 6-12 months. Not that they will decelerate markedly, but that they will stop accelerating and therefore stop being the driving force pushing core CPI higher. But if you use those models, you have to recognize that you are calibrating over a period of very slow inflation, so that you are effectively ignoring the knock-on effect of higher inflation on rents. That is, if core inflation is around 2% and rents are 3%, then if core inflation rises to 5% you wouldn’t expect rents to be at 3%. So, you need to use a model that recognizes the interrelationship between these variables. And that sort of model implies that rents will continue to climb. Both models of Owners’ Equivalent Rent are shown in the chart below. I prefer the “real” model to the “nom” model, but we don’t know the right answer yet.


Even if OER moderates it doesn’t mean that CPI will stop rising; it just means that the story will stop being all about rents. Core goods still have a long ways to go to normalize, and that might be the next story. But for now, I am still focused on rents.

As I said, I really don’t see how the Fed can think about hiking rates in September based on the data we have seen recently. Yes, inflation is on the border of being an issue, but that has been true for a long time. In 2011, there was plenty of growth and while high rates would not have been warranted, it is hard to argue that normal rates were not called for. And yet, we got QE and more QE. This will end up being the biggest central bank error in decades, regardless of what the Fed does in September. I doubt they will hike, and if they do then it won’t be a long series of hikes. This is still a very dovish central bank, and they will get skittish very quickly if markets balk at more expensive money – which, of course, they are wont to do.

Summary of my Post-CPI Tweets

July 17, 2015 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 with interests in this area be sure to stop by Enduring Investments.

  • Core CPI +0.18%, y/y rises to 1.77%. Pretty much as-expected on the headline figures.
  • Was some market concern about a possible higher print following PPI, but there isn’t much correlation.
  • Note that the next two months of CPI will ‘drop off’ an 0.10% and an 0.05%, so we should get to 2% on core inflation by mid-September.
  • Of course the Fed’s target is ~2.25% on core CPI (since they tgt core PCE) so Fed can argue it’s still below tgt. Uptrend may concern.
  • Housing inflation on the other hand going to the moon
  • This is great chart and it’s the reason core never had a chance of entering deflation territory. & will go up. (retweeted Matthew B)


  • Housing #CPI overall just hit 2% y/y. Primary rents 3.53%. OER, which is 24% of the whole CPI, rose to 2.95% from 2.79%. Wow!
  • …our model for OER is at 3.1%, and the actual number HAD been lagging. I love it when a plan comes together.
  • So housing drove core services to +2.5% y/y, core goods -0.4%.
  • So if housing busted higher, what was the services offset? Medical care, 2.51% y/y vs 2.84% last month.
  • WSJ argued earlier this month that is expected because under Ocare people are actually spending their own money.
  • Within medical care, drugs went to 3.44% vs 4.05%, pro svcs went 1.83% from 1.58%, and hospital & related to 3.48% from 4.51%. So maybe?
  • Yes, core PCE & core CPI are going to be rising. But core PCE won’t be anywhere close to the Fed’s tgt by Sep.
  • Here is core and median CPI (the latter not out yet today) and core PCE.


  • core commodities are about where they should (eventually) be, given rally in TW$. A bit ahead of schedule though.


  • This chart means either that home prices are overextended or incomes need to catch up, or both.


  • Here is our OER model that is based on incomes. Not a tight fit but gets direction right.


  • I wondered about this when I paid $180/night for room in S. Dak. Hotel infl driven in part by fracking boom?


  • probably would fit better if I used a regional lodging index rather than national, I suspect.

The summary of today’s CPI release is that the underlying pressures remain the same, and the trends remain the same. The really interesting dynamic going forward isn’t in CPI (although at some point when core goods starts to rise again, that will be quite interested), but in how the Fed reacts to the CPI. When they meet in September, core CPI will be around 2%, a bit shy of where the Fed’s target is. But the uptrend will be clearly apparent, and core and median CPI will likely be closer to 2.5% than 2% by the end of the year.

So the interesting dynamic is this: even though inflation is below the Fed’s target, and growth isn’t great shakes, and there are risks to the global economic system in Europe and in China…will the Fed tighten in September anyway? If they do, then it will be surprising if only because the FOMC passed on many opportunities over the last five years which would have been much more accommodating (no pun intended) to a normalization of rates. Sure, if they now recognize that they should have tightened three years ago it shouldn’t color their decision today – the best time to plant a tree may have been thirty years ago, but the best time that we can actually choose from is today – but the Fed hasn’t usually been so limber in its reasoning. Especially with a very dovish makeup of the Committee, I would be surprised to see them hike rates unless inflation has surpassed their target and growth is pretty strong with global risks receding.

However, the strength of my view on that has been slipping recently. Although I think most of the Fed’s talk on this point is mere bluster, we do have to pay attention when Fed speakers – and especially the Chairman – say the same things multiple times. While Yellen has expressed only an expectation that the Fed will raise rates later this year (and we have no idea how conditional that expectation is on stronger growth, on Chinese growth, on European volatility etc, she has said this multiple times and at some point I have to conclude she means it. I still think that the odds of getting rates even up to 1% in a single series of moves is slim, but I admit the more-consistent Fed chatter is worth listening to.

Categories: CPI, Tweet Summary Tags: , ,

Summary of My Post-CPI Tweets

May 22, 2015 2 comments

Here 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.


  • CPI Day! Exciting. The y/y for core will “drop off” +0.20% m/m from last yr, so to get core to 1.9% y/y takes +0.29 m/m this yr.
  • Consensus looks for a downtick in core to 1.7% y/y (rounding down) instead of the rounded-up 1.8% (actually 1.754%) last mo.
  • oohoooooo! Core +0.3% m/m. y/y stays at 1.8%. Checking rounding.
  • +0.256% m/m on core, so the 0.3% is mostly shock value. But y/y goes to 1.81%, no round-assist needed.
  • Headline was in line with expectations, -0.2% y/y. Big sigh of relief from dealers holding TIPS inventory left from the auction.
  • Core ex-shelter was +0.24%, biggest rise since Jan 2013. That’s important.
  • This really helps my speaking engagement next mo – a debate between pro & con inflation positions at Global Fixed Income Institute. :-)
  • More analysis coming. But Excel really hates it when you focus on another program while a big sheet is calculating…
  • It’s still core services doing all the heavy lifting. Core goods was -0.2% y/y (unch) while core services rose to 2.5% y/y.
  • Core services has been 2.4%-2.5% since August.
  • Owners’ Equivalent Rent rose to 2.77% y/y, highest since…well, a long time.
  • Thanks Excel for giving me my data back. As I said, OER was 2.77%, up from 2.69%. Primary rents frll to 3.47% from 3.53%.
  • Housing as a whole went to 2.20% y/y from 1.93%, which is huge. Some of that was household energy but ex-energy shelter was 2.67 vs 2.56
  • Or housing ex-shelter, ex-energy was 1.14% from 0.67%. Seems I am drilling a bit deep but getting housing right is very important.
  • Medical Care +2.91% from 2.46%. Big jump, but mostly repaying the inexplicable dip from Q1. Lot of this is new O’care seasonality.
  • Median is a bit of a wildcard this month. Looks like median category will be OER (South Urban), so it will depend on seasonal adj.
  • But best guess for median has been 0.2% for a while. Underlying inflation is and has been 2.0%-2.4% since 2011.
  • And reminder: it’s median that matters. Core will continue to converge upwards to it, (and I think median will go higher.)
  • None of this changes the Fed. They’re not going to hike rates for a long while. Growth is too weak and that’s all they care about.
  • For all the noise about the dual mandate, the Fed acts as if it only has one mandate: employment (which they can’t do anything about).
  • The next few monthly core figures to drop off are 0.23%, 0.14%, 0.10%, and 0.05%.
  • So, if we keep printing 0.22% on core, on the day of the Sep FOMC meeting core CPI will be 2.2% y/y, putting core PCE basically at tgt.
  • I think this is why FOMC doves have been musing about “symmetrical misses” and letting infl scoot a little higher.
  • US #Inflation mkt pricing: 2015 1.1%;2016 1.8%;then 1.8%, 2.0%, 2.0%, 2.1%, 2.2%, 2.3%, 2.4%, 2.5%, & 2025:2.4%.
  • For the record, that is the highest m/m print in core CPI since January 2008. It hasn’t printed a pure 0.3% or above since 2006.


There is no doubt that this is a stronger inflation print than the market expected. Although the 0.3% print was due to rounding (the first such print, though, since January 2013), the month/month core increase hasn’t been above 0.26% since January 2008 and it has been nearly a decade since 0.3% prints weren’t an oddity (see chart, source Bloomberg).


You can think of the CPI as being four roughly-equal pieces: Core goods, Core services ex-rents, Rents, and Food & Energy. Obviously, the first three represent Core CPI. The breakdown (source: BLS and Enduring Investments calculations) is shown below.


Note that in the tweet-stream, I referred to core services being 2.4%-2.5% since August. With the chart above, you can see that this was because both pieces were pretty flat, but that the tame performance overall of core services was because services outside of rents was declining while rents were rising. But core services ex-rents appear to have flattened out, while housing indicators suggest higher rents are still ahead (Owners’ Equivalent Rent, the bigger piece, went to 2.77%, the highest since January 2008). Core goods, too, look to have flattened out and have probably bottomed.

So the basic story is getting simpler. Housing inflation continues apace, and the moderating effects on consumers’ pocketbooks (one-time medical care effects, e.g., which are now being erased with big premium hikes) are ebbing. This merely puts Core on a course to re-converge with Median. If core inflation were to stop when it got to median, the Fed would be very happy. The chart below (Source: Bloomberg) supports the statement I made above, that median inflation has been between 2% and 2.4% since 2011. Incidentally, the chart is through March, but Median CPI was just released as I type this, at 2.2% y/y again.

median thru march

But that gentle convergence at the Fed target won’t happen. Unless the Federal Reserve acts rapidly and decisively, not to raise rates but to remove excess reserves from the banking system (and indeed, to keep rates and thereby velocity low while doing so, a mean trick indeed), inflation has but one way to go. Up. And there appears little risk that the Fed will act decisively in a hawkish fashion.

Summary of My Post-CPI Tweets

April 17, 2015 3 comments

Below you can find a recap and extension of my post-CPI tweets. You can 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.

  • Core CPI+0.23% m/m is the story, with y/y upticking to 1.754% (rounded to +1.8%). This was higher than expected, by a smidge.
  • Core services +2.4% y/y down from 2.5%. But core goods -0.2%, up from -0.5% last mo and -0.8% two months ago. Despite dollar strength!
  • Core ex-housing rose to 0.91% y/y from 0.69% at the end of 2014. Another sign core inflation has bottomed and is heading back to median.
  • The m/m rise of 0.20% in core ex-shelter was the highest since Jan 2013.
  • Primary rents 3.53% y/y from 3.54%; OER 2.693% from 2.687%. Zzzzz…story today is outside of housing, which is significant.
  • Accelerating major groups: Apparel, Transport, Med Care, Recreation (32.1% of index). Decel: Food/Bev, Housing, Educ/Comm, Other (67.9%)
  • …but again, in housing the shelter component (32.7% of overall CPI) was unch at ~3% while fuels/utilities plunged to -2.26% from flat.
  • [in response to a question “Michael we have been scratching our heads on this one… is it some impact of port strike do you think?”] @econhedge I don’t think so. But core goods was just too low. Our proxy says this is about right.
  • @econhedge w/in core goods, Medical commodities went to 4.2% from 3.9%, new cars from 0.1% to 0.3%, and Apparel to -0.5% from -0.8%.
  • @econhedge so you can argue Obamacare effect having as much impact as port strike. But it’s one month in any case. Don’t overanalyze. :-)
  • Medicinal drugs at 4.46% y/y. In mid-2013 it was flat. That was a big reason core CPI initially diverged from median. Sequester effect.
  • @econhedge Drugs 1.70%, med equip/supplies 0.08% (that’s percentage of overall CPI). 8.7% and 0.4% of core goods, respectively.
  • Median should be roughly 0.2%. I have it up 0.21% m/m and 2.22% y/y, but I don’t have the right seasonals for the regional OERs.
  • Further breakdown of medical care commodities: the biggest piece was prescription drugs, +5.74% y/y vs 5.19%. The other parts were lower.

The main headline of the story is that core inflation rose the most month-over-month since May. After a long string of sub-0.2% prints (that sometimes rounded up), this was a clean print that would annualize to 2.7% or so. And it is no fluke. The rise was broad-based, with 63% of the components at least 2% above deflation (see chart, source Enduring Investments, and keep in mind that anything energy-related is not part of that 63%) and nearly a quarter of the basket above 3%.


This is no real surprise. Median has consistently been well above core CPI, which implied some “tail categories” were dragging down core CPI. These tail categories are still there (see chart, source Enduring Investments), but less than they had been (compare to chart here). Ergo, core is converging upward to median CPI. As predicted.


The next important step in the evolution of inflation will be when median inflation turns decisively higher, which we think will happen soon. But that being said, a few more months of core inflation accelerating on a year/year basis will get the attention of the moderates on the Federal Reserve Board. I don’t think it will matter until the doves also take notice, and this is unlikely to happen when the economy is slowing, as it appears to be doing. I don’t think we will see a Fed hike this year.

Summary of my Post-CPI Tweets

Below you can find a recap and extension of my post-CPI tweets. You can 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.

  • core CPI +0.157%, so it just barely rounded to +0.2%. Still an upside surprise. Y/Y rose to 1.69%, rounding to 1.7%.
  • y/y headline now +0.0%. It will probably still dip back negative until the gasoline crash is done, but this messes up the “deflation meme”
  • (Although the deflation meme was always a crock since core is 1.7% and rising, and median is higher).
  • Core ex-housing +0.78%. Still weak.
  • Core services +2.5%. Core goods -0.5%, which is actually a mild acceleration. So the rise in core actually came from the goods side.
  • Accelerating major cats: Apparel, Transp. Decel: Food/Bev, Housing, Med care, Recreation, Other. Unch: Educ/Comm. But lots of asterisks.
  • Shelter component of housing rose back to 3% (2.98%) y/y; was just fuels & utilities dragging down housing.
  • Primary rents: +3.54% y/y, a new high. Owners’ Equiv Rent: 2.69%, just off the highs.
  • In Medical Care, Medicinal Drugs 4.13% from 4.16%, but pro services +1.47 from +1.71 and hospital services 3.28% from 4.08%.
  • In Education and Communication: Education decelerated to 3.5% from 3.7%; Communication accel to -2.2% from -2.3%.
  • 10y breakevens +3bps. Funny how mild surprises (Fed, CPI) just run roughshod over the shorts who are convinced deflation is destiny.
  • No big $ reaction. FX guys can’t decide if CPI bullish (Fed maybe changes mind and goes hawkish!) or bearish (inflation hurts curncy).
  • Here’s my take: Fed isn’t going to be hawkish. Maybe ever. So this should be a negative for the USD.

This CPI report was a smidge strong, but just a smidge. The market was looking for something around 0.12% or so on core, and instead got 0.16%. To be sure, this is another report that shows no sign of primary deflation, but still it amazes me that inflation breakevens can have such a significant reaction to what was actually just a mild surprise. That reaction tells you how pervasive the “deflation meme” has become – the notion that the economies of the world are headed towards a deflationary debt spiral. I am not saying that cannot happen, but I am saying that it will not happen unless somehow the central banks of the world decide to stop flushing money into the system. And honestly, I see no sign whatsoever that that is about to happen.

As I wrote last week, it should be no surprise that this is a dovish Fed that will perpetually look for reasons to not tighten, and will do so only when the market demands it. My guess is that will happen once inflation, breakevens, and rates rise, and stocks fall. And this doesn’t look imminent.

Outside of housing, core inflation still looks soft. But housing inflation is accelerating further, as has been our core view for some time. The chart below (data source: Bloomberg) shows the y/y change in primary rents is at 3.54%. The median in primary rents for the period for 1995-2008 (the 13 years leading up to the crisis) was 3.20%. And during that time, core inflation ex-housing was 1.72% (median).


Like most data, you can use this to argue two diametrically-opposed positions. You might argue that the Fed’s loose money policy has helped re-kindle a bubble in housing, as inflation in rents of 3.54% with other core prices rising at 0.78% suggests that housing is in a world of its own. Therefore, the Fed ought to be removing stimulus, and tightening policy, to address the bubble in housing (and the one in equities) and to keep that bubble from bleeding into other markets and pushing general prices higher. But the flip side of the argument is that core inflation outside of housing is only 0.78%, so therefore if the FOMC starts removing liquidity then we may have primary deflation, ex housing. Accordingly, damn the torpedoes and full steam ahead on easing.

The data itself can be used right now to make either argument. Which one do you think the Fed will make?

Follow-up question: given that the Fed has historically one of the worst forecasting records imaginable, which argument do you think is actually closer to correct?


Summary (and Extension!) of My Post-CPI Tweets

February 26, 2015 3 comments

Below you can find a recap and extension of my post-CPI tweets. You can 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.

  • CPI -0.7%, core +0.2%. Ignore headline. Annual revisions as well.
  • Core +0.18% to two decimals. Strong report compared to expectations.
  • Core rise also off upwardly-revised prior mo. Changing seasonal adj doesn’t affect y/y but makes the near-term contour less negative.
  • y/y core 1.64%, barely staying at 1.6% on a rounded basis.
  • Core for last 4 months now 0.18, 0.08, 0.10, 0.18. The core flirting with zero never made a lot of sense.
  • Primary rents 3.40% from 3.38% y/y, Owners’ Equiv to 2.64% from 2.61%. Small moves, right direction.
  • Overall Housing CPI fell to 2.27% from 2.52%, as a result of huge drop in Household Energy from 2.53% to -0.06%. Focus on the core part!
  • RT @boes_: As always you have to be following @inflation_guy on CPI day >>Thanks!
  • A bit surprising is that Apparel y/y rose to -1.41% from -1.99%. I thought dollar strength would keep crushing Apparel.
  • Also New & Used Motor Vehicles -0.78% from -0.89%. Also expected weakness there from US$ strength. Interesting.
  • Airline fares, recently a big source of weakness, now -2.98% y/y from -4.71% y/y.
  • 10y BEI up 4bps at the moment. And big extension tomorrow. Ouch, would hate to have bet wrong this morning.
  • Medical Care 2.64% y/y from 2.96%.
  • College tuition and fees 3.64% from 3.43%. Child care and nursery school 3.05% from 2.24%. They get you both ends.
  • Core CPI ex-[shelter] rose to 0.72% from 0.69%. Still near an 11-year low.
  • Overall, core services +2.5% (was +2.4%), core goods -0.8% (was -0.8%). The downward pressure on core is all from goods side.
  • …and goods inflation tends to be mean-reverting. It hasn’t reverted yet, and with a strong dollar it will take longer, but it will.
  • That’s why you can make book on core inflation rising.
  • At 2.64% y/y, OER is still tracking well below our model. It will continue to be a source of upward pressure this year.
  • Thank you for all the follows and re-tweets!
  • Summary: CPI & the assoc. revisions eases the appearance that core was getting wobbly. Median has been strong. Core will get there.
  • Our “inflation angst” index rose above 1.5% for the 1st time since 2011. The index measures how much higher inflation FEELS than it IS.
  • That’s surprising, and it’s partly driven by increasing volatility in the inflation subcomponents. Volatility feels like inflation.
  • RT @czwalsh: @inflation_guy @boes_ using surveys? >>no. Surveys do a poor job on inflation. See why here:  …
  • 10y BEI now up 5.25bps. 1y infl swaps +28bps. Hated days like this when I made these markets. Not as bad from this side.
  • Incidentally, none of this changes the Fed outlook. Median was already at target, so the Fed’s focus on core is just a way to ignore it.
  • Once core rises enough, they will find some other reason to not worry about inflation. Fed isn’t moving rates far any time soon.
  • Median CPI +0.2%. Actually slightly less, keeping the y/y at 2.2%.

What a busy and interesting CPI day. For some months, the inflation figures have been confounding as core inflation (as always, we ignore headline inflation when we are looking at trends) has consistently stayed far away from better measures of the central tendency of inflation. The chart below (source: Bloomberg), some version of which I have run quite a bit in the past, illustrates the difference between median CPI (on top), core CPI (in the middle), and core PCE (the Fed’s favorite, on the bottom).


I often say that median is a “better measure of central tendency,” but I haven’t ever illustrated graphically why that’s the case. The following chart (source: Enduring Investments) isn’t exactly correct, but I have removed all of the food and beverages group and the main places that energy appears (motor fuel, household energy). We are left with about 70% of the index, about a third of which sports year-on-year changes of between 2.5% and 3.0%. Do you see the long tail to the left? That is the cause of the difference between core and median. About 12% of CPI, or about one-sixth of core, is deflating. And, since core is an average, that brings the average down a lot. Do you want to guide monetary policy on the basis of that 12%, or rather by the middle of the distribution? That’s not a trick question, unless you are a member of the FOMC.


Now, let’s talk about the dollar a bit, since in my tweets I mentioned apparel and autos. Ordinarily, the connection between the dollar and inflation is very weak, and very lagged. Only for terribly large movements in the dollar would you expect to see much movement in core inflation. This is partly because the US is still a relatively closed economy compared to many other smaller economies. The recent meme that the dollar’s modest rally to this point would impress core deflation on us is just so much nonsense.

However, there are components that are sensitive to the dollar. Apparel is chief among them, mainly because very little of the apparel that we consume is actually produced in the US. It’s a very clean category in that sense. Also, we import a lot of autos from both Europe and Asia, and they compete heavily with domestic auto manufacturers. As a consequence, the connection between these categories and the dollar is much better. The chart below shows a (strange) index of New Cars + Apparel, compared to the 2-year change in the broad trade-weighted dollar, lagged by 1 year – which essentially means that the dollar change is ‘centered’ on the change in New Cars + Apparel in such a way that it is really a 6-month lag between the dollar and these items.


It’s not a day-trading model, but it helps explain why these categories are seeing weakness and probably will see weakness for a while longer. And guess what: those categories account for around 7% of the “tail” in that chart above. Ergo, core will likely stay below median for a while, although I think both will resume upward movement soon.

One of the reasons I believe the upward movement will continue soon is that housing continues to be pulled higher. The chart below (source: Enduring Investments using Bloomberg data) shows a coarse way of relating various housing price indicators to the owners’ rent component of CPI.


We have a more-elegant model, but this makes the point sufficiently: OER is still below where it ought to be given the movement in housing prices. And shelter is a big part of the core CPI. If shelter prices keep accelerating, it is very hard for core (and median) inflation to decline very much.

One final chart (source Enduring Investments), relating to my comment that our inflation angst index has just popped higher.


This index is driven mainly by two things: the volatility of the various price changes we experience, and the dispersion of the price changes we experience. The distribution-of-price-changes chart above shows the large dispersion, which actually increased this month. Cognitively, we tend to overlook “good” price changes (declines, or smaller advances) and recall more easily the “bad”, “painful” price changes. Also, we tend to encode rapid up-and-down changes in prices as inflation, even if prices aren’t actually going anywhere much. I reference my original paper on the subject above, which explains the use of the lambda. What is interesting is the possibility that the extremely low levels of inflation concern that we have seen over the last couple of years may be changing. If it does, then wage pressures will tend to follow price pressures more quickly than they might otherwise.

Thanks for all the reads and follows today. I welcome all feedback!


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