Archive

Archive for the ‘Tweet Summary’ Category

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

Summary of My Post-CPI Tweets

December 15, 2015 2 comments

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

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

coremed

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

coregoodsserv

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

wgtover3

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

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

healthins

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

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

corexshelt

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

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

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

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

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

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

Summary of My Post-CPI Tweets

November 17, 2015 5 comments

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

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

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

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

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

medsvcs

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

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

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets

October 15, 2015 Leave a comment

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

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

cpidist

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

medagain

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

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

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

Follow

Get every new post delivered to your Inbox.

Join 2,298 other followers

%d bloggers like this: