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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, just published! The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • Ah, CPI day!
  • Writing today from the skies above…Pennsylvania maybe? Hi Pennsylvania!
  • Not sure how well this will work…bear with me.
  • Street forecast for core is 0.182% or so m/m, rounding to 0.2% and 2.2% y/y.
  • But if core is only 0.187% m/m, y/y will rise to 2.3% after rounding. So a low hurdle for a “surprise”
  • Since this year core has averaged 0.208% (and 0.243% ex-March), I suspect a good chance of a 2.3% y/y print.
  • Over the next 2 months we have comparisons of 0.173% and 0.155% from year-ago, so core likely rises further.
  • As a reminder, median CPI is already at 2.53% and a 7-year high so such a move in core isn’t a shock.
  • But all that is in the future. We get today’s CPI in 14 minutes.
  • Note my response to tweet messages will be worse than normal today… from 35,000 feet this is a bit wonky.
  • 17% on core. y/y to 2.23% from 2.24%. Be still my heart.
  • Have to wait for the breakdown…not trusting numbers at this altitude. But looks like Medical Care jumped. Not sure what went dn then.
  • OK, Housing 2.39% from 2.38%. Apparel 0.42% from 0.53%; Medical Care – 3.65% from 3.17%! Small drips elsewhere.
  • Core services stayed 3.2% and core goods dripped to -0.6% y/y.
  • Within Housing: Primary rents 3.81% from 3.80%. Should keep rising. OER 3.25% from 3.26% ditto.
  • Big jump in Lodging Away from Home: small category and volatile but excites some people. Not me.
  • Motor vehicles -0.82% from -0.50%, still dragging on core goods.
  • In Medical Care: Drugs 3.40% from 2.34%. Yes, >1% acceleration in y/y. Volatile but…
  • Balancing that a bit was Professional Services 2.60% from 2.81%. But Hospital Services 4.12% from 3.25%.
  • And Health Insurance? +7.10% vs 6.30%. Thanks, ACA.
  • With drugs pushing core goods higher, not sure what was going the other way enough to make core goods decelerate some.
  • Good Lord they just said we’re over Wisconsin. Already?
  • Take this projection for Median CPI with a grain of salt, but looks to me like +0.19% and the annual rate stays 2.5%.
  • biggest monthly declines were toddlers’ apparel, jewelry and watches, footwear, and used cars/trucks.
  • biggest monthly gains in fuel oil, motor fuel, car and truck rental, and medical care commodities (drugs).
  • core ex-housing still fairly low at 1.37%.
  • Overall – core and median inflation still are in rising trends, but nothing particularly alarming about this month’s figure.
  • Certainly, nothing that is going to turn Pres. Mester from talking about helicopter drops to talking about tightening.
  • That’s all for now…thanks for bearing with me.
  • Be sure to look at our Crowdfunder equity raise: https://www.crowdfunder.com/enduring-investments-llc … The subscription package is up and live!

Last month’s core inflation number was not pretty. Medical care rose, rents jumped, and in general it was a sloppy mess. This month is not like that. The story is one of continuing trends: a trend to higher rents, higher medical care inflation; continued weakness in apparel and transportation and other core goods. The key point though is that there is no sign that inflation is about to fall. Whether bottom-up, aggregated from the detailed pricing data, or top-down, looking at money supply growth and possible velocity outcomes, the uptrend in prices looks steady.

While that could change, if interest rates continue to decline and depress money velocity even further, it can’t be the null hypothesis at this point. What is amazing is that the market, in its pricing of inflation, has made that the null hypothesis. Breakeven inflation is low, low, low for more than a decade in the future according to the market. Considerably lower than today’s core inflation. It is a bet that looks increasingly out-of-whack.

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, just published! The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • CPI coming up in 15 mins. Consensus is +0.3% headline +0.2% core, putting y/y core up to 2.2% again.
  • Base effects for core suggest better chance for y/y rise for next 4mo or so.
  • Stay tuned, 10mins to CPI. In the meantime why not check out our Crowdfunding campaign? https://www.crowdfunder.com/enduring-investments-llc … (Accredited inv only)
  • Core CPI +0.203% m/m; y/y rises to 2.235%.
  • Core goods remains at -0.5% y/y; core services rises to 3.2%, highest since 2008.
  • Housing jumped to 2.37% y/y from 2.11%. Looking at breakdown to see if that’s in rents or elsewhere in housing.
  • Medical Care had fallen from 3.29% y/y to 2.98% last month. Back up to 3.17%, which is the general trend: higher.
  • Apparel flipped to +0.58% y/y vs -0.57% y/y. Only about 5% of core CPI, but a bellwether we’ve been watching (with little result so far).
  • tweeted this earlier…note that strong base effects lifted y/y CPI but next 3 months comparison also easy.

last12

  • Within Housing, Primary rents rise to 3.80% from 3.73%. OER jumps HUGE, to 3.264% from 3.147%. Big jump for a big part of basket.
  • …and that’s not a misprint. All pressures on rents are higher, and remain higher.
  • Lodging away from home is small, but was a drag last mo. Not this mo: rises to 3.83% y/y from 1.32%
  • In Medical Care, drugs actually fell to 2.34% y/y from 2.84%. But professional svcs 2.81% from 2.26%; Hospital svcs 3.25% v 3.15%
  • Health insurance 6.30% y/y from 5.80%.
  • y/y change in Health Insurance CPI

bfmE9AC

  • y/y in med care services – resuming uptrend

medcaresvcs

  • optimists can look at core ex-housing and see a rise to only 1.42%. But that’s b/c goods carry much more weight in that look.
  • W/in transportation, new and used vehicles was actually a drag, -0.50% y/y from -0.27%. That’s in core goods.
  • y/y core hasn’t been above 3% for 20 years. But will be in 2017.
  • y/y core hasn’t been above 3% for 20 years. But will be in 2017.
  • Early estimate of Median CPI…+0.26% m/m with y/y going to 2.53%, a new cycle high.
  • Probably a good time to mention the crowdfunding for Enduring Investments again: https://www.crowdfunder.com/enduring-investments-llc… Own an inflation manager!
  • Bottom line for today: nothing at all soothing in this report. Upward inflation trend continues.

Nothing at all soothing, indeed. A day after the FOMC chose to stand pat on interest rates, core inflation pushed back higher and median inflation is about to push above 2.5% for the first time since 2009 (when it was on the way down). Of course, nothing about this inflation picture, and the rotten internals that suggest higher figures are in store, would have changed the Fed’s decision yesterday. As noted previously in this space, the Yellen Fed fundamentally does not believe that inflation is a threat; if it is a threat, they believe a little inflation is okay if allowing inflation to run hot helps the overall economy and the little guy; and if they later decide inflation does need to be addressed, it can be easily reined in.

They are wrong on all three counts, and we may well be seeing the beginnings of a colossal error. Honestly, the question here is between whether it is only a bad error that is fixable or a colossal error that isn’t fixable without much pain. Inflation is headed higher.

And yet, ironically, standing pat on interest rates will slow down the near-term rise in inflation since it will keep money velocity from rising as rapidly as it would if interest rates were rising. The best way to keep cash inert is for alternative investment opportunities to remain poor! But money growth around 7% is too fast, even if velocity merely flatlines. Inflation will continue to rise for the balance of this year and into 2017 (at least).

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, just published! The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • In prep for CPI: Econs forecasting about 0.15% core; Cleveland Fed’s Nowcast is 0.18%; avg of last 4 months is 0.20%.
  • So, econs which have been too bullish on econ for a year (see citi surprise index) are bearish on CPI.
  • If we get any m/m core less than 0.20% (even 0.19%), y/y will round to 2.1% b/c dropping off high 2015 April.
  • But after that, next 8 months from 2015 were <0.20% so any downtick wouldn’t be start of something new.
  • Hard to tell but the core CPI print was SLIGHTLY above expectations. 0.195%, so y/y was 2.147%.
  • In other words, if someone charged another nickel for a candy bar somewhere we would have had 2.2% again. <<hyperbole
  • That 0.195% m/m was lower than April 2015, but higher than May, June, July, Aug, Sep, Nov, and Dec.
  • Core services unch at 3.0%; core goods downticked to -0.5% y/y.
  • y/y Medical Care decelerated for second month in a row, down to 2.98% y/y; still looks to be in a broad uptrend from 2% in 2014. [ed note: chart added for clarity]

medcarecpi

  • Within Medical Care, medicinal drugs accelerated, prof svcs was flat. Hospital svcs dropped from 4.33 to 3.15% y/y
  • Hospital services oscillates – we’ll probably get that back to 4%-4.5% which will push med care back up.
  • Primary Rents 3.73% from 3.66%. OER 3.15% from 3.12%. Some were expecting deceleration there. Not us!
  • Lodging Away from Home dropped to 1.32% from 2.27%. That, and various home furnishings, is why Housing subcat went to 2.12 vs 2.14.
  • But Rents and OER are the stable measures…not Lodging, not furnishings.
  • Core ex-housing fell to 1.39% from 1.48%, but again that’s due to elements of med care and housing that are likely to rebound.
  • Lots of movement within Apparel but overall nothing. The February pop looks like a one-off.
  • Overall, a more buoyant number than expected and the stuff holding core CPI down are the transient things.
  • Biggest m/m declines: infants’/toddlers’ apparel (-26.5% annualized), fresh fruits & veggies; women’s apparel; Lodging away from home.
  • Biggest m/m outliers: Motor Fuel (+152.3% annualized), Fuel Oil, Processed Fruits & Veggies; Motor Vehicle Insurance.
  • My estimate of median CPI is actually 0.28% m/m and 2.46% y/y. But…
  • …but the median category this month may be affected by regional housing, and I don’t have the BLS factors. So grain of salt needed.
  • This summarizes the inflation story. Rents and Services ex-rents both rising ~3%. Core goods is the anchor.

threecat

Discussion: after last month’s surprising m/m core CPI print of +0.07%, many were questioning whether that was the outlier, or whether the +0.29% and +0.28% of January and February were the outliers. The answer might be that they are all outliers, as this month’s print was very close to the 4-month average. But even so, +0.2% m/m would produce a 2.4% core inflation number by the year’s end. That’s consistent with what we are being told by Median inflation. Both figures would suggest core PCE, after all of the temporary effects are removed, is essentially at or slightly above the Fed’s 2% target.

There are two pertinent questions at this juncture. The first is whether the Fed will feel any urgency to raise rates more quickly because of this data. The answer to that, I think, is clearly “no.” This Federal Reserve’s reaction function seems to be overly (and overtly) tilted towards growth indicators – and even more than that, their forecast of growth indicators. The majority of the Committee also believes that inflation expectations are “anchored” and so inflation can’t really move higher very quickly. They only pay lip service to inflation concerns, and honestly they aren’t even very good at the lip service.

The second question is where inflation goes next. Whether the Federal Reserve raises the target overnight rate or not, the question of inflation is relevant for markets. And the indicators seem to be fairly clear: the larger and more persistent categories are seeing price increases of around 3% or more, while the main drag comes from a “core goods” component that is highly influenced by the lagged effect of dollar strength (see chart, source Bloomberg).

coregoodsvsusd

Recently, the dollar has been weakening marginally but still is in a broad uptrend (looking at the broad, trade-weighted dollar). But if the buck merely goes flat, core goods will start to move higher. And that means even if core services remain steady, core inflation should push towards 3% later this year.

This doesn’t sound like much but it would be highly significant (and surprising) for many observers, investors, and consumers. Core inflation has not been above 3% for two decades (see chart, source Bloomberg).

coreCPIunder3

This means – incredibly – that many students in college today have never seen core inflation above 3%, and more importantly many investors have not seen core inflation above 3% during their investment lives. When core inflation breaches that level, it will feel like hyperinflation to some people! And I do not think markets will like it.

Summary of My Post-CPI Tweets

Following is a concatenation of my post-CPI tweets. You can follow me @inflation_guy. Due to scheduling issues, I don’t have any further development of the observations highlighted below.

  • OK, 4 minutes until CPI. If I had to guess what a theme, I would say the question of whether apparel and medical care trends continue.
  • Is apparel the canary in the coal mine from recent jumps? And is CPI or PPI right about medical care? The latter has been softer.
  • Weak CPI number! 0.1%/0.1% and y/y core slipped to 2.2%!
  • even weaker than that…+0.07%, 2.20% exactly y/y on core. That’s a really big surprise.
  • first glance – medical care y/y slipped, and apparel y/y plunged. getting more detail
  • core services slipped to 3.0% from 3.1%; core goods dropped to -0.4% from +0.1%
  • while i’m waiting for more detail…this CPI doesn’t mean it’s done going up; just that we can’t reject the hypothesis that it’s not.
  • have to remember these are experiments – underlying inflation rate not knowable so we can only reject hypotheses.
  • my suspicion: we may be able to lean more to the “apparel was seasonal” hypothesis but jury is out on medical care normalization.
  • ok – apparel -0.64% from +0.89% y/y. medical care 3.29% from 3.50%. housing up small, recreation, education/comm, other all up small.
  • within apparel: Mens suits/sportcoats/outerwear -7.6% from -4.6%. Mens furnishings -1.2% from +2.2%. Mens pants/shorts -5.8% from +2.4%
  • but WOMENS outerwear 5.5% from 3.2%; suits & separates +0.2% from -0.3%. Dresses down though, -6.3% from -4.3%.
  • so could be seasonal…but we will have to wait to know for sure. weird, anyway.
  • in housing: Primary rents 3.66% vs 3.68%; OER 3.12% vs 3.16%. lodging away from home 2.27% v 4.19%. so rise in housing was HH energy.
  • In Medical: drugs 2.49% v 2.34%. Prof svcs 2.27% vs 2.54%. hospital 4.33% v 4.90%. Insuance 6.20% v 5.97%. Similar read to PPI.
  • PPI and CPI don’t have much overlap, or we would rely more on the earlier PPI. So hard to read much.
  • does mean core PCE not likely to converge as quickly with core/median CPI.
  • ok last tweet: early estimate on median still looks like +0.17%, 2.39%, down vy slightly from 2.43% y/y.

None of this changes the underlying focus: median at 2.4% and core converging upward to it. And there’s still no sign that housing is about to weaken. Core goods had been strengthening; this has been arrested but it may be a function of the early Easter (however, Easter occurred for men, too…). As I suspected early – this is a holding-pattern number, certainly weaker than inflation bulls expected but it doesn’t dash the underlying trends…yet. This makes the April number, released next month, more important!

And none of this changes the underlying points I made in a Marketwatch opinion article that appeared yesterday. You can read that article here.

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets

March 16, 2016 2 comments

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

  • Good morning and welcome to another wonderful CPI day!
  • Three notes before CPI prints in 17 minutes: First, the market is expecting a “soft” 0.2% core (something like 0.16%, rounding up)
  • Second: If we get exactly 0.2% core, then y/y will round higher to 2.3%. Third: if we get exactly 0.3%, y/y core will round to 2.4%.
  • Highest core print since the crisis was 2.32% in 2012. We have a shot of exceeding that today with a robust print.
  • Ten minutes to CPI and time for 1 more coffee and a commercial message: please buy my new book! http://amzn.to/21uYse8
  • whoopsie, core CPI +0.3%. Actually 0.28%, puts y/y at 2.34%. Yayy, a new post-crisis record!
  • Ouch, seems like a big jump in y/y Medical Care, waiting for the breakdown. If so, that makes core PCE jump even more (again).
  • So back to back months we’ve had 0.29% and 0.28%. I hate to say I told you so but…
  • I said 2.33%, Actually 2.34%. We were VERY close to printing 2.4% y/y & setting off panic at the Fed. Which is abt 4 yrs overdue.
  • I should say 4 years and $2 trillion overdue.
  • [retweet from @boes_] Core consumer price inflation ex-shelter really accelerating: was 1.6% year over year in February

Cdq368CW8AALaxb

  • core cpi. What, me worry?

whatmeworry

  • while I wait for my sheets to calculate, let me stress this is not meaningless for the FOMC meeting today.
  • Arguments for waiting another meeting before raising rates are very thin. https://mikeashton.wordpress.com/2016/03/14/feeble-arguments-against-a-rate-hike/
  • i have got to put this database on a faster computer. OK, core services 3.1% from 3% and core goods +0.1% from -0.1%.
  • first positive y/y in core goods in two years.
  • Housing: 2.12% from 2.10%. Primary rents (3.68% from 3.71%) and OER (unch at 3.16%) are NOT the drivers of the core jump.
  • Lodging away from home 4.19% vs 2.67%, but that’s a small piece of CPI (<1%)
  • Apparel had big jump in y/y rate to 0.89% from -0.53%, but again Apparel as a whole is 3% of headline, 4% of core.
  • Medical care: 3.50% from 3.00%. Yep.
  • Drugs 2.34% from 2.21%. Professional svcs 2.54% from 2.08%. Hospital svcs 4.90% from 4.32%. Health insurance 5.97% from 4.76%. Ouch.
  • Med care is ~10% of core, so that 50bp jump is 0.05% on core.
  • And remember, Medical care gets a HIGHER WEIGHT in the Fed’s preferred measure, core PCE.
  • U-G-L-Y CPI ain’t got no alibi. It’s ugly (woot! woot!) it’s ugly.
  • The good news is pretty thin gruel. Median CPI should be +0.22% or so, keeping y/y around 2.42%. At least it isn’t running away yet.
  • Also, NEXT month we roll off an 0.21% from the y/y figure. So the hurdle will be higher for an uptick in core CPI.
  • Like I said, thin gruel. There can be no doubt whatsoever that deflation risks are zero for the foreseeable future.
  • Stocks are doing tremendously well with this, only -9 points or so S&P futures. This is awful news for equities.
  • …but some observers like to spin “rising inflation” as “sign of robust growth.” Nope. See “1970s” in your encyclopedia.
  • The only way this is good news is if you recently wrote a book on inflation. Which, as it turns out, I did: http://amzn.to/1RNTjZu
  • Distribution of price changes. You can be forgiven for seeing this as giving the Fed the finger.

distribution

As much as I like to talk, there’s just not a lot more to say. This number is awful, as it not only was well above expectations (the m/m figure was about double the rise which analysts expected) but also it wasn’t driven by shelter but rather by Apparel (a little) and – worst of all – Medical Care. Here is a chart of y/y Medical Care (Source: Bloomberg).

medcare

Here is a subcomponent of medical care, “Professional Services” (Source: Bloomberg).

proserv

And finally, again, here’s the context. This chart (Source: Bloomberg) shows median inflation (top line), core inflation converging on it (middle line), and core PCE shooting higher (bottom line). Note that the top and bottom lines are not updated for the most-recent month.

threeinflchart

At this hour, stocks  are inexplicably unchanged. This is awful news for stocks, which tend to be most-highly valued when inflation is low and stable and the Fed is quiescent. Now we have inflation that is moderate, but rising, and a Fed which is not only active, but with numbers like this may eventually become more so. If they do not, it is only because growth is weak (and weakening)…and someone please explain to me why that is a positive environment for stocks? One can make an argument that bonds can do okay if growth flags (even though growth does not cause or lead inflation), because real rates are too high for the level of nominal rates and that could conceivably reach equilibrium by TIPS rallying rather than nominal bonds selling off. But it’s a hard argument to be bullish on the big two asset classes. (However, I expect Wall Street to make that argument loudly.)

Summary of My Post-CPI Tweets

February 19, 2016 2 comments

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

  • whoopsie daisy! core CPI +0.3%.
  • …actually +0.29%, so not just a barely-round-up thing. Y/Y t0 2.22%. Both comfortably above consensus.
  • Next month, we drop off a +0.16% from last year so even a +0.20% print on core would push us to 2.3% in Feb.
  • Core converging with median, as expected. Look at chart. What impression will it give FOMC?

core

  • core services +3% from +2.9% y/y; core goods to -0.1% from -0.4%. least-negative in two years.
  • I am not sure the core goods improvement can be sustained, yet, given lagged effects of dollar. Will eventually, though.
  • dealers holding all those 30y TIPS from y’day auction feel better today.
  • Cpi breakdown shortly. Taking unusually long to parse the data. Really need to optimize my database.
  • OK! Housing 2.10% from 2.07%. Primary rents 3.71% from 3.68% and OER 3.16% from 3.14%. So housing isn’t the big story.
  • Medical care: 3.0% from 2.58% y/y. As the mythbusters would say, “there’s yer problem.”
  • Medicinal drugs 2.21% from 1.66%; Professional svcs to 2.08% from 1.92%, Hospital 4.32% from 3.96%.
  • Medicinal drugs is what to watch going fwd. That’s in core goods & in 2015 fell from 5% to 1.7%
  • motor vehicles +0.51% from +0.14% y/y. Also in core goods.
  • Of interest – the fall in energy prices has reduced “food and energy” to 21% from 22.3%. So core is bigger.
  • Core ex-shelter 1.47% from 1.29%…highest since 3/2013. I think @TheStalwart showed a picture of that earlier.
  • This is less and less just a housing phenomenon.
  • OK, good news is that it looks like median CPI ought to be about 0.18%ish, so y/y will inch back up to 2.5% but not jump to 2.6%.
  • Also interesting is that the diffusion indices didn’t go wacky. So this number is not QUITE as bad as it seems at first blush.
  • Still the overall trend is clear: housing and now core ex-housing inflation are headed higher.
  • Still very hard for the Fed to ignore the core CPI chart. And PCE will be worse, because it is heavier in medical care.
  • I think March just went back on the table for the FOMC.

So, here are the main takeaways from this month’s report:

First, inflation in medical care is coming back, and that is starting to blunt the deflation in other core goods. At this point, the question is whether medical care inflation goes back to what it was prior to the Affordable Care Act, or goes higher. Although I am a staunch opponent of Obamacare, and I believe it will drive costs higher overall, I think anecdotally there are some signs that the free market is working to correct some of the most egregious failings of the Act. So it may not be quite as bad as it otherwise would be. Still, it appears the temporary lull in medical care inflation is past us.

Second, the fact that medical care was a big driver in this month’s CPI report means the core PCE report will likely be worse, since medical care carries a much larger weight in core PCE. This is why core PCE has been weaker than core CPI for some time, but that will correct.

Third, and a related point: the lagging measures of inflation are catching up with median CPI. The chart below, which is really just an expanded version of the chart above, doesn’t have the updated median CPI, which will be released later today, but that line won’t look much different. And it doesn’t have the updated core PCE, which will be released next week. But you can see what is happening to core CPI, which is the middle line.

cpis

Fourth, core goods prices are not likely to suddenly explode higher. The delayed impact of dollar strength, while it will not drive deflation broadly, will keep a lid on core goods inflation for a while longer. However, the core goods part of CPI is the less important and persistent part, and services (driven by housing, but no longer just by housing) continues to accelerate.

Fifth, the Federal Reserve had been inching away from the expectation that they would tighten in March, due to weak global growth and domestic equity markets. I think that possibility just landed back squarely on the table. If folks don’t realize it today, they will realize it when core PCE “surprises” higher next week.

And all of this means that higher inflation remains in our future. The notion that deflation is some kind of existential threat makes as much sense as the notion that alien invasion represents an existential threat: possible, but not something that ought to keep us awake at night worrying. Inflation expectations do not drive inflation – it is the other way around. Inflation is headed higher, whether people – and the FOMC – expect it, or not.

Summary of My Post-CPI Tweets

January 20, 2016 4 comments

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

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

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

ratiomedoer

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

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

dollarvscore

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

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

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

 

Categories: CPI, Tweet Summary
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