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Summary of My Post-CPI Tweets (March 2019)

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 or Enduring Intellectual Properties. Plus…buy my book about money and inflation. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • About 6 minutes to CPI. Consensus calls for 0.2% on core. The last few have been 0.20, 0.23, 0.18, and 0.24.
  • y/y core should stay at 2.2% after rounding – We are dropping off 0.174% and it would take a really weak figure to push y/y lower and a really strong one to make it round to 2.3%.
  • Last month, one of the big drivers was primary rents. Pundits saw last month’s CPI as very strong; I thought it was only slightly above expectations.
  • It’s surprising to see the forecasts at 0.2% on core, actually, given the narratives about how strong that inflation figure was, and how it came from Rents that many forecasters are bearish on. I thought we’d see 0.1% forecasts.
  • So we’ll watch primary rents of course, but I still think the trend in core goods is an interesting one to watch. Last month y/y core goods reached the highest level since 2013. Just barely out of deflation, but with the trade situation that’s where we want to watch.
  • So, here we go. Good luck all.
  • Yep, there we go. Core CPI only 0.11%, making the y/y 2.08%. Just when pundits were finally thinking inflation could be a “problem,” and stopped forecasting weakness…we get weakness!
  • Last 12. You can see why people were worrying if you cover the last bar. But the uptrend was not as big as it looked. And we’re really just bumping along in the 2.1-2.3% zone on core.

  • There are some interesting crosscurrents in this number. Remember how I said Rents were strong last month? They were again this month. Y/Y Primary rents rose to 3.51% from 3.43%; OER went to 3.32% from 3.21%. Lodging Away from Home another jump.
  • https://platform.twitter.com/widgets.js

  • Other Goods and Services were +0.54% m/m, which is a big jump for a catch-all category. Worth drilling deeper. Medical Care and Recreation had big drops.
  • Core Goods dropped to 0.1% y/y from 0.3%. A significant contributor there was a decline in CPI-Used Cars and Trucks, which fell to 1.1% from 1.6% y/y. That’s not as big a deal as you think. But it’s big enough to matter at the margin in core goods.
  • Our model has core goods rising a bit further, and you can see that even a simple look like a correlation with core import prices suggests we should see a bit more. And with tariffs, hard to think the dip in core goods sticks.

  • I mentioned Used cars and trucks fell, but New vehicles rose to 0.29% y/y from 0.04%, reversing last month’s decline. Overall, used and new together (which is 7% of CPI!) fell to 0.49% from 0.92%.
  • Now let’s look at medical care. 1.73% y/y from 1.90% for the broad category. Medicinal drugs fell to -1.12% y/y from -0.36%. Again, core goods. Actually I wonder what core goods ex pharma and cars must have been doing so core goods only fell to 0.1% from 0.3% y/y!
  • Now this is really interesting. Pharma as I said was negative, and is continuing an amazing trend. But think this looks amazing?

  • Here’s what the pharma looks like in terms of level. Medicine prices have peaked? Is the move to biologics, which tend to be cheaper, accelerating and causing this? Or…

  • …or is this just another period like 2012-2013, when we had a temporary slowdown (driven by medicare if I recall) but then caught up? FWIW, my guess is that this slowdown represents a real evolution in care, though I don’t think we’ve seen the end of pharmaceuticals.

  • https://platform.twitter.com/widgets.js

  • Back to Medical Care: Professional Services fell to 0.97% from 1.16% y/y; Hospital and Related Services decelerated to 2.12% from 2.44%. This is helping hold down core services generally. But Health Insurance (which in CPI is a residual) rose smartly. Now 7.66% y/y from 6.46%.
  • Here’s health insurance. Only 1.1% of CPI, which is one way you know it’s just a residual. CPI accounts for the increase in care costs mostly directly so this chart doesn’t show the full story of what’s happening in insurance. But it’s a cool chart.

  • College Tuition and Fees rose to 3.13% from 2.93%. It has started to rise again partly because market returns were worse last year (60/40 was -2.4% and many other asset classes declined too).

  • Biggest declines on the month, with annualized rates of change: Car and Truck Rental (-57%), Jewelry and Watches (-34%), Leased Cars and Trucks (-18%), and Medical Care Commodities (pharma) (-11%).
  • Biggest increases on the month, with annualized rates of change: Misc Personal Goods (52%), Men’s and Boys’ Apparel (50%), Infants’ and Toddlers’ Apparel (33%), Fuel Oil and Other Fuels (21%).
  • This month we will again be reminded why looking at Median CPI matters. My guess at Median CPI is 0.26%, which would bring y/y back up to 2.78%. Won’t know for a few hours.
  • Lest we think that inflation markets behave rationally…here are 10-year inflation swaps in red, against current median CPI. Calling for a lot of deceleration that we’re not seeing in the data yet.

  • Core ex-shelter declined this month to 1.18% y/y from 1.39%. OK, so that’s one place we’re seeing deceleration. So you might say that inflation markets are betting on a serious deceleration in housing inflation.
  • Well, we see a slowdown in OER, but not such a large one that long-term inflation swaps look fair.

  • So for the cherry on top here are the four pieces charts. Each one is about a quarter of CPI, plus or minus, in order of least stable to most. First is Food and Energy.

  • Second piece is core goods. Setback this month, but I’m not convinced that used cars and trucks are leading the way on this series at the moment.

  • Core Services less Rent of Shelter. Here’s where the disinflationists need to make hay. And medical care inflation is helping them. Hard to see anything but a downtrend here at the moment.

  • On the other hand, Rent of Shelter – the most stable component – continues to NOT COLLAPSE as some are expecting it to. Yes, shelter costs are outrunning wage growth. But not so much any more, thanks to accelerating wages.

  • Actually, that wages/rents thing is a bit of a canard. Here is the Atlanta Fed’s Wage Growth Indicator vs Rent of Shelter. Wages have actually been keeping up fine with housing inflation. (& the increased cost of housing is one reason people are fighting for higher wages).

  • In conclusion, until I think of something else: last month CPI wasn’t as strong as people thought; this month is isn’t as weak as people think. With interest rates soggy the risk of a serious inflation debacle in this stroke of the economic cycle is receding. However…
  • …however, I do think that we are unlikely to see in the next recession anything like the dip we saw in the last recession. There’s a lot of good news in the figure right now. And when interest rates start to rise again, we’re going to see a higher high.
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Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (February 2019)

February 14, 2019 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 or Enduring Intellectual Properties. Plus…buy my book about money and inflation. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

I usually post these the day of CPI but I was traveling and didn’t get to do so. These were my tweets in the immediate aftermath of the CPI report.

  • About 15 minutes to CPI. Today’s stream-of-consciousness will be a little more relaxed since I’m at a conference in Florida at the moment!
  • As for the number today, here are some thoughts.
  • We’ve recently begun to see some reduction in pressure from truckload rates upstream. Not down, but rising more slowly. Bottlenecks in overland are easing somewhat. Higher prices are still passing through but less alarm about it.
  • Housing price increases have also been slowing. Again, we’re talking second-derivative stuff; they aren’t falling nationwide. Rents are loosely related to prices, so I don’t think we’ll see much downward pressure there yet, but it’s a meme at the moment.
  • Wage growth remains strong, but wages lag inflation so that’s not much illumination.
  • There is decent momentum in some other categories, and…tariffs. Remember we don’t need tariffs to get worse growth/inflation outcomes than the last 20 years; we just need less forward progress on trade. And we have that for sure! (Again with the second derivatives??)
  • I’ve been expecting an interim peak in median CPI later in 2019. It’s not here yet, and I might still be wrong about that and see it climb further. Inflation after all is a process with momentum. But that’s my current expectation.
  • However, I ALSO don’t expect that when median CPI eventually turns lower that it will fall anywhere close to the prior lows. I think we’ve begun a long-term cycle of higher highs and higher lows in inflation.
  • Now, money growth is picking up again, and higher rates over the last year imply higher velocity going forward. But globally we have more negative-rate debt, so that’s dampening. But the macro pressures on inflation remain to the positive side.
  • For today, the Street sees 0.2% on core, dropping y/y to 2.1% because drop off a difficult +0.3% comp from last January. The January figure sees a number of interesting cross currents. I suspect there’s a smidge of upside risk to this number, but I have low confidence on that.
  • We will see, in 5 minutes.
  • ok, 0.24% on core CPI, a bit higher than expected and BARELY kept core from rounding lower to 2.1%, even dropping off the strong Jan 2018

  • 15% is core to 2 decimal places y/y.
  • Primary rents 0.31% m/m after 0.21%, but y/y still declined to 3.43% vs 3.47%. As I said, rents only loosely related to prices and rent slowing has still been only at the margin.
  • Owners’ Equiv Rent was 0.27% vs 0.22% last, with y/y unchanged at 3.21%. So the big chunk of housing was reasonably strong. Actually Lodging Away from Home, which had a very large jump last month, had another decent rise this month. It’s only 0.9% of CPI but no “AirBnB” effect.
  • So the macro interesting thing is that core services declined to 2.8% y/y, thanks to the gradually slowing housing I think, while core goods rose to 0.3%.
  • That’s the highest core goods since 2013. Our models think this is headed up to 0.5% before flattening, but … tariffs. Our models don’t include them. This is the underlying pressure.

  • OK, so Apparel is 0.11% y/y, basically unchanged. Jump this month, but that looks seasonal. Medical care declined to 1.90% y/y vs 2.01%. Recreation rose to 1.36% vs 1.14%.
  • There was some chatter that a change the BLS made in how it accounts for quality change in some communications categories could drag down the CPI like cell phones did last year, but it’s a much smaller effect. Education/Communication was 0.31% y/y vs 0.21% last month.
  • Sorry for the interlude…some tech glitch. Anyway…picking up. Education was 2.72% y/y vs 2.62% last month; Communication was -1.68% vs -1.76%. So the rise in Education/Communication was from both parts.
  • Not so in Medical Care. Medical Care Commodities were -0.28% vs -0.50%; Med Care Services 2.45% vs 2.64%. So the overall small decline in Medical Care (1.90% vs 2.01% y/y) was basically entirely from the “Hospital and Related Services” category (2.44% vs 3.64%).
  • The other Medical Care categories – medicinal drugs, Professional Services, and Health Insurance – all rose. But they were counterbalanced by the Hospital part.
  • Median this month might be really interesting. Rough calculation suggests that a housing sub-category that Cleveland Fed calculates might be the median category so it’s hard to tell. But I think Median y/y will drop from 2.77% to 2.64%. Might even be worse.
  • Core ex-housing fell to 1.39% from 1.51%. So, there’s definitely some signs of softness here even though Core Goods is providing upward pressure. Working on the 4-pieces breakdown now.
  • Core ex housing chart. Sorry not too many charts today. Little harder to do remotely.

  • OK the four pieces. For those new to this analysis, I break CPI into these four pieces, each roughly 1/4 of CPI (19%-33%).

  • Here are the four pieces, from most-volatile to least-volatile. Part 1 is Food and Energy. Clearly holding down headline CPI but this is why we look through it. Look at that y axis!

  • Part 2 is Core Goods. With the trade frictions, this is presently the most interesting piece. Even if the tariffs implemented by the Administration are dropped, we’ve still stopped the forward trade momentum of the last quarter century. So this bears watching.

  • Core Services less Rent of Shelter. A lot of this is Medical Care, and while it looked like we might be breaking the long downtrend recently…maybe not so much.

  • Finally, rent of shelter. Off the highs, but our models don’t have it dropping seriously. Housing prices still rising, albeit more slowly. And rents, while high relative to wages, are now getting a following wind from rising wages. I suspect this will meander.

It seems, from reading the other post-mortems, that some people saw this as a very strong number. It really wasn’t…slightly stronger than expected. But I guess it depends on your state of mind coming in. I’ve thought the underlying run rate of core CPI was something like 0.22% per month, and with seasonal issues in January thought we’d be a touch higher than consensus. I suppose if you thought inflation was falling off a cliff you might have expected something much weaker. The composition, too, was solid but unspectacular. Again, if you thought rents were about to collapse then you were surprised that it was only down a little on a y/y basis. The core goods rise is important, but again – not unexpected.

So is inflation running “hot”? Well, if you think 2.2% is hot, I suppose so. But Median CPI also declined on a y/y basis, as have wages recently. Don’t get me wrong, I think inflation is still rising and probably will for most of this year. But it’s not shooting higher and if I were at the Fed and if I believed what they believed, I wouldn’t be alarmed by this number (I am not at the Fed and I don’t believe what they believe, for the record).

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (January 2019)

January 11, 2019 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 or Enduring Intellectual Properties. Plus…buy my book about money and inflation. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • A few minutes to CPI. Consensus 0.2%, 2.2% y/y on core, pretty much on the dot. That’s slightly lower on core than last month, which ALMOST rounded to 2.3%, but dropping off a strong Dec ’17. Remember Median is 2.82%, near the highs.
  • it will be hard to get a ‘handle surprise’ on core CPI today. But watch Apparel, which has been weirdly weak despite tariff tensions. Used cars/trucks has been strong for a couple months and is due to be back normal, but not to “retrace” as it was too low before.
  • In general, look at core goods, which last month went flat after a long time in deflation. And keep an eye on core-ex-shelter, which is near multi-year highs.
  • 21% on core, 2.21% y/y. Basically a consensus number.
  • Pretty stable last few months of core.

  • Core goods 0.1% y/y, down from 0.2% y/y last month. Core Services unch at 2.9% y/y.
  • Core goods right on schedule.

  • OER 0.23% m/m, dropping y/y because of base effects back to 3.22%. Had been a y/y bounce last year because of those base effects but now pretty much back to trend. Primary rents 0.20%, 3.48% y/y, also down.
  • Inflation bears will point at “Lodging Away from Home,” +2.74% m/m, and say that is an aberration. But it’s really just reversing a very weak recent aberration. Y/y up to 0.91%; had been -1.37%. So ignore those people.
  • Pharma was weak, at -0.43% m/m and -0.58% y/y.

  • Doctors services also remains fairly low. Hospital Services however accelerated to 3.67% y/y from 3.52% y/y. Overall, Medical Care was roughly steady at 2% y/y.

  • Used Cars and Trucks was -0.18%, dropping y/y to 1.43% vs 2.30%. It was due to decelerate, and that’s roughly in line.

  • Apparel is back to positive y/y, at +0.3% vs -0.6%, but that’s mostly base effects. Only very small rise this month. That continues to be a head-scratcher. I’d expect to see trade frictions show up in apparel quickly. But this is a Dec number, and so maybe stockpiling pre-xmas.
  • Core ex-housing was 1.50% y/y, down slightly from 1.53% y/y last month. That remains near 5-year highs, but still waiting for the break higher.
  • Core ex-shelter chart.

  • By the way, if you have kids I hope they’re girls. In apparel, Boys’ apparel is +13.1% y/y…Men’s footwear is +4.3%…nothing else is over +0.5%.
  • Recreation is a pretty small part of CPI (5.7%), but rose from 0.61% y/y to 1.16% y/y. Inflation in Cable and Satellite Services, Pets and Pet Products, and “Admissions” were the main culprits. Pets are “recreation?” I think of them more as Transportation. Or Food.
  • Just kidding.
  • College Tuition and Fees +2.7% y/y, up a small amount but continuing to run ahead of headline and core.
  • Looks like a regional housing index will be the median category this month, which means my median guess isn’t as sharp. My estimate is 0.23% m/m, making the y/y 2.80% down from 2.83%. Median is a better measure of inflation trend since it ignores outliers.
  • This is an important chart. It shows Median CPI (without today’s number, not out yet) vs 10-year inflation swaps. You can see how bearish the market has gotten recently. Some of this is oil but these are 10y swaps so that shouldn’t matter much.

  • I almost forgot to mention that Wireless telephone services weakened again to -3.19% from -3.03% y/y. More interestingly, Land-line went to -0.02% from 0.46%. Even more interesting, land-line spending is only about a third as large as wireless. Here’s a chart of landline.

  • Let’s wrap this up with the four-pieces charts. First piece is food & energy. Weirdly linear deceleration.

  • The piece I think is a very important story going forward: core goods. Out of deflation and I think it’s going higher. This is where trade tensions are most important.

  • Core services less Rent of Shelter…still look to be in a downtrend, mostly thanks to medical. If we’re going to have an inflation accident, it should also show up here.

  • Rent of Shelter. Going nowhere fast. And that means you’re not getting deflation any time soon.

  • Final thought: next month we drop off a +0.35% m/m from core (from Jan ’18), which means it is pretty likely we see a drop in core towards 2%. That makes a Fed hike harder. But then the comparisons get easier, as my 12-month m/m core CPI chart showed.
  • Core is unlikely to drop below 2% any time soon, and in my view we’re likely to see 2.5% before 1.9%, and median inflation above 3% before long. But the Fed has a couple months’ reprieve before the choices get tougher.
  • That’s all for today. Thanks for tuning in.

Today’s CPI number is an acceptable one for the Fed. Right on the screws, showing no unanticipated accelerations. But also, no decelerations! Next month, core should decelerate, but that is likely to be the last good news for a while on inflation. Now, there are some reasons to think that the upward trend on inflation might be ending sooner than I have thought, and I’ll get into those reasons over the next week or two. But for now, the story is that the Fed has some breathing room to stop and watch for a while, and avoid some critical Presidential tweets while seeming to be principled. The difficult test will come in a few months when inflation starts heading higher even while growth, and stock markets, head lower. It may well be that we have seen the last tightening for a while – if the Fed Chair were Bernanke or Yellen, they’d already be easing, but Powell seems to be made of sterner stuff (but read my prior post about whether there is a Powell put). However, it has been easy up until now, with growth strong enough to take some hikes, inflation heading the wrong direction, and rates below any semblance of neutral. The next year or two is where the Fed’s job gets difficult as they have to navigate crosscurrents.

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (December 2018)

December 12, 2018 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 or Enduring Intellectual Properties. Plus…buy my book about money and inflation. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • Been a while since I did a live CPI dive here. Thanks to all of those who voted with their dollars over the last year and supported my private CPI tweets. It wasn’t enough to make a commitment to it, so I’m back to occasionally doing it free on this channel. Hope it helps.
  • I do it anyway for myself and Enduring Investments, so it’s not THAT big a deal to put it here if I happen to be in the mood. Anyway, hope you get some value. If so, think about whether I or Enduring can help your investment processes. Now for the walk-up.
  • Consensus calls for about 0.18% on core CPI today, with the y/y rising to 2.2%. The bouncy PPI helps the mood although the PPI itself doesn’t have much forecasting power for CPI.
  • in PPI there were clear freight and other upstream pressures though. We haven’t really seen much of this in CPI – no real trade/tariff effect yet e.g. Apparel is where I’d expect to see than and in core goods generally. But they’re still slightly in deflation.
  • I think there’s some upward risk to used cars and trucks, but there was a big jump last month so we could get a retracement of that before another move higher next month, or continue the ‘catch up’ to private surveys this month. Hard to tell on a month-to-month basis.
  • Lodging Away from Home took a dip last month and might be upside risk today. Medical Care is due to start rising again too. So in a minute, we will see!
  • Slightly stronger core than expected…0.21% when they were looking for 0.18%. But pretty close.

  • 21% on NSA core y/y.
  • Let’s see. Core goods went up to 0.0% y/y from -0.1%, so that’s moving in the expected direction. Another big month from Used Cars and Trucks, +2.37% m/m after +2.62% last month. y/y now up to 2.30%. It was negative just a few months ago.

  • Lodging Away from Home rose from -2.42% y/y to -1.38% y/y, as we got a small positive this month after a big negative last month. I’m still skeptical that hotel prices are in deflation but someone will yell “AIRBNB” loud enough like that’s an argument, so I’ll leave it there.
  • Hefty lift in Primary Rents. +0.36% m/m, bringing y/y to 3.61% from 3.57%. That’s news because lots of pundits have been decrying the end of the housing market and therefore housing inflation. These aren’t necessarily the same thing.
  • Apparel actually took another large fall m/m. This continues to make little sense in a tariffy world.

  • Some of that is dollar strength, sure. But I’m still surprised.
  • Medical was +0.37% m/m after -0.07%, so that came through as I expected/hoped. Y/y rose to 2.03% vs 1.71%. Both Pharma and Doctor’s Services rose nearly 0.5% m/m after declines last month. Interesting that despite this, and housing, core services were unch at 2.9% y/y.
  • Core inflation, ex-shelter rose to 1.53%, almost at the 2016 highs (1.61%). The disinflationary impulses are deep in the rear-view mirror now.

  • The Apparel breakdown is always so weird. Y/Y, “Boys’ apparel” is +11.9% while “Girls’ apparel” is -0.7%. Hokay.
  • Brace yourself for a big jump in Median. Looks like the median category is a housing subindex so my estimate won’t necessarily be accurate but it won’t be LOWER than 0.28% m/m and my best guess is 0.33% m/m pushing y/y median CPI to 2.83%. Won’t know for a few hours yet.
  • 83% if it happened would be basically back to the highs. So the question is, what’s keep Core Services from a bigger bounce if housing and medical care are both looking strong?
  • Motor Vehicle Insurance? This is 2.4% of CPI.

  • Health insurance rising again…we knew this was true on the wholesale level but seems to be coming thru retail as well. But CPI measures health insurance inflation in an odd way, too much to get into here.

  • Oh no. Are you kidding me? Wireless telephone services -3% y/y down from -0.5%y/y last month. *smh* Here we go again?

  • Currently triumph of hope over experience in stocks. This figure clearly puts the Fed squarely still in tightening mode. And I don’t expect any major easing of inflationary pressures soon.
  • Kind of a good reminder of how out over their skis the inflation shorts are here. With Median at 2.7% or 2.8% after today, here’s the core cpi curve from inflation swaps (calculated by Enduring Investments). X-axis is years. Tremendous confidence that the Fed will win.

  • Now, to be sure the hurdles for y/y core get higher over the next few months, with Dec ’17 at +0.24% m/m and Jan ’18 at +0.35% (remember that??), so core will probably not reach new highs until Q2. But there’s nothing here to give confidence that inflation is about to fall.
  • Let’s do the four pieces. For new followers, these four pieces are each roughly a quarter (0.2%-0.3%) of CPI. The first and most volatile is Food & Energy. We don’t spend a lot of time on this. No forecasting power.

  • Piece 2 is core goods, the smallest of these 4 pieces but the main thing that has kept inflation sedated over last half decade. Now out of deflation even with a strong dollar. Sustainable? In a de-coupling world, maybe.

  • Core services, less rent of shelter. long downtrend still in place. This includes stuff like medical care, but also wireless services. Which really ought to have its own category I’m starting to think!

  • Steadiest piece is Rent of Shelter. This is just coming back to model. No real upstream signs that this is about to roll over – it was just ahead of itself. Latest point is actually an up-wiggle.

  • One more chart. The weight of the distribution of y/y changes. You can see the big bars for housing but the long tail. The bar at left is mostly food, energy, tech, and apparel at the moment. Without those categories, CPI is around 2.8%, right around median.

No real reason to wrap this one up – the numbers speak for themselves. Despite the weakness in energy, which is killing the inflation markets (since energy is most of the volatility in headline inflation, to which TIPS and inflation swaps are tied), prices in general continue to rise and if anything seem to be gaining a little steam even outside of housing. Housing inflation isn’t likely to move very far in either direction for a while from the current level, so the next movement in core or median CPI is going to come from core-ex-shelter categories like Medical Care (possibly looking up), Apparel (quite heavy), and other core goods like autos.

But there’s no reason whatsoever in these numbers to indicate to the Federal Reserve that it’s time to stop raising rates. To the extent that they begin to chirp about a pause, it’s because they want stock prices to go up (or, I guess, more accurately they just don’t want to be blamed for the bear market). Yes, growth is slowing but no formulation of the Taylor Rule is going to give a lot of cover to a decision to ease off of rate hikes when the policy rate is below the current rate of inflation.

Summary of My Post-CPI Tweets (October 2018)

October 11, 2018 Leave a comment

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

  • Only 20 minutes to CPI!
  • This month, we are looking for something of a correction to last month’s terribly weak and surprising core CPI (0.08% m/m).
  • Recall that last month, Apparel plunged -1.6% m/m – which seems at odds with a world of higher landed costs due to tariffs.
  • The only way that would make sense is if BLS were backing out the tariffs from the retail prices, but this isn’t like sales tax – no good way to disentangle tariffs since some products have ’em and some don’t.
  • So Apparel prices are due for a bounce. That’s well-understood out there in inflation land I think.
  • The apparel plunge was the driving force pushing core goods to -0.2% y/y when it had gotten all the way up to 0.0% y/y the prior month. It’s hard to get a lot of inflation without core goods being positive!
  • Other parts of core goods remain perky, such as Used Cars and Trucks. Probably some further gains due there.
  • The core services component was also soft last month, as OER softened slightly (but it has a big weight) and medical care declined.
  • I’m starting to get less confident that Medical Care will have a big upswing because of work I’m doing in pharma inflation. But at the same time, the y/y looks like it may have fallen too far too fast. And I don’t think doctors’ services +0.8% y/y makes a lot of sense.
  • All in all, the odds I think favor a solid 0.2% or above. This would cause y/y core to reaccelerate from 2.19% back to the 2.3% range b/c we’re dropping off an 0.13% from last Sept. To get a 2.4% print on core, we’d need 0.29% or better m/m, which is a stretch.
  • …but not out of the question if last month’s surprises are totally reversed.
  • The bottom line I am really watching is core-ex-shelter, which has been rising and is the key to the next leg higher in inflation. Housing won’t carry the water.
  • We’re down to about 12 minutes here before the number and one thing I want to add: more than recent CPIs this is likely a pretty important number for the stock market. Climbing CPI –> higher rates;stocks aren’t handling that well right now. A soft CPI is really good for stocks.
  • Ordinarily equities ignore CPI, but maybe not today.
  • One last point to make is that even with the weak month last month, core CPI is up at a 2% annualized pace over the last quarter. Median is at 2.5% annualized over the last 3 months. So we’re not talking deflation here.
  • Another very soft CPI. 0.116% on core. As that is roughly in line with what’s dropping off from a year ago, y/y core stays about the same at 2.2%.
  • First glance is that Apparel bounced but OER was weaker. If that’s true then this isn’t as weak as it looks.
  • 2.17% y/y on core, down from 2.18%, so as I said basically unch.
  • No doubt however that this is a huge relief to stocks. Even if it is stronger than it looks on the surface, it’ll help take the Fed off the relative boil (not like they’ve been crazy hawkish, just by recent standards)!
  • Incredibly, the subcomponents are AGAIN being slow-rolled by Bloomberg and this time looks like that’s because the BLS is being slow releasing the data. Crazy. Someone get them a new laptop.
  • Yayy! Finally getting data. So Apparel was +0.93% m/m, which raised y/y from -1.41% to -0.55%. Partial retracement and makes more sense. Only 3% of the CPI basket but a big move makes some difference.
  • Ah, here’s the thing. There was a MASSIVE decline in CPI-Used Cars of -2.99% m/m. That’s completely absurd. It puts y/y to -1.47% from +1.25% in that category, pushes core goods from -0.2% to -0.3%, and dampened overall CPI.
  • But it makes NO SENSE. Private surveys of used vehicle prices are still rising at around 4% per year. This is complete nonsense.
  • Here’s the chart. Used cars had been closing the gap. Again, this is nonsense. And it’s a big enough category to matter some.

  • Moving on…OER was only 0.18% m/m, pushing the y/y to 3.27% from 3.33%. Primary Rents were 0.24% m/m, 3.63% y/y up from 3.61%.
  • The OER modest deceleration isn’t terribly problematic although home prices are still rising quickly enough that I wouldn’t expect it to get much slower than it currently is. Primary Rents still rising, which puts the cherry on that point.
  • Lodging Away from Home plunged -1.01% m/mm, so the y/y dropped to 0.57% from 2.34%. Large moves in that index aren’t terribly unusual, so this isn’t an “AirBnB effect.” Will probably be reversed next month.
  • Back of the envelope by the way (and I know I’m refusing to let cars go again) is that Used Cars cost about 0.075% on core CPI. Put that back and your 0.116% becomes 0.191% m/m…right on expectations.
  • Medical Care remains weak. Pharma -0.19% m/m, but rises to 1.17% y/y from 0.77% because of base effects. Doctors’ Services 0.26% m/m, with y/y up to 0.46%..not exactly running away. And Hospital Services softened to 3.79% y/y from 4.17%.
  • BUT, because of those base effects, Medical Care overall rose to 1.73% y/y vs 1.54%.
  • doctors’ services:

  • Forgot to update this chart, last 12 core CPI prints. Although, as I said, this one is bogus.

  • Core ex-housing, even with the cars nonsense (he really just won’t let it go, will he??), accelerated to 1.38% from 1.34%. That’s still below the 1.5% hit in July, but we’d be just about there without those cars you know.
  • Here’s core ex-shelter. If you think the Fed is “going crazy” tightening, it’s because of this. Right about in the middle of the last two decades’ range. But I think it’s heading up.

  • All this talk about used vehicles…I should note that New Vehicles rose to 0.47% from 0.30% y/y. Placidly approaching the upper end of the range.

  • For something completely different, there was a rise in Cable & Satellite television service this month after a long slide. That’s 1.5% of the overall CPI…about 3/4 the weight of used cars!

  • So let’s see…m/m largest declines were …hey! Used Cars and Trucks #1, Footwear #2, and Lodging Away from Home #3. We’ve discussed two of those. Biggest gainers were Mens/Boys Apparel (retracement), Car & Truck Rental (splutter), and another couple of apparel categories.
  • Now, here’s why I prefer Median CPI. It’s totally for months like this. Median this month ought to be around 0.22%, meaning y/y should be almost exactly unch at 2.77%. As always, my Median is an estimate, but it should be pretty good this month.
  • And that’s the REAL story – inflation continues to motor along at about 2.8%, when measured using an index that isn’t perverted by inaccurate surveys of cars.
  • So here’s the summary. Great number for stocks, because they don’t care about the details. It’s not really a soft number, though – all one category. Core goods at -0.3% really ought to be at 0.3% or 0.4% (see chart), and assuming it does converge there we’ll see core CPI resume.

  • But you don’t really need Core CPI because Median is already telling you what you need to know: inflation is in the high 2s. The rebound from last year is over, and last few numbers have been basically flat around 2.8%.
  • Same story in this chart, showing the weight of categories inflating faster than 3%. It’s pretty steady and has been for a while. This is why we were able to ‘look through’ the 2017 slowdown in core CPI. The middle of the distribution was stable/rising slightly.

  • The key question for the next leg, up or down, is what happens to core goods. Housing, as I wrote recently, is not about to accelerate or decelerate in a MAJOR way. The next leg will have to come from other categories catching up.
  • With a following wind from clearly-rising wages and “protection” from offshore price competition, this seems very probable. Ergo, I expect Median to be over 3% in the next quarter or two. We’re not talking hyperinflation, but it’s going to keep creeping higher.
  • People sometimes ask me, “don’t you think the Fed knows how to look through the CPI to see what’s really going on?” The answer is no, I do not. I’ve yet to find a Fed person who gets very down and dirty with the data in a way that’s illuminating (as opposed to a wonky model).
  • OK, to wrap this up let’s look at the four pieces charts and tell the story (for new followers: these four pieces are each around 1/4…actually 0.2-0.33…of overall CPI). First, Food & Energy.

  • Next, Core Goods. Already discussed. This should be, and will be, higher.

  • Core Services less Rent of Shelter. A lot of this is Medical Care Services and I’m less bullish on that than I have been. It would help the bull-inflation story to see this above 3%, but I’m just not sure it can get there in short order.

  • Finally, Rent of Shelter. It’s probably a bit below where it should be, but as I recently wrote it’s not going to be doing anything dramatic here for a while.

  • That’s all for today. I just want to conclude by saying that it is a NATIONAL EMBARRASSMENT that we can’t accurately measure the behavior of used car prices. Not to put too fine a point on it.
Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (September 2018)

September 13, 2018 4 comments

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

  • Half hour to CPI. Early thoughts:
  • This is one of those months where, because they have different survey respondents, the consensus core CPI index number does not match up with the consensus core y/y number.
  • the index number implies 0.19% m/m rise in core. But we are rolling off 0.21% or so, and only barely ticked to a rounded 2.4% core CPI last month. Ergo, if we get that index number we’ll see a rounded 2.3% on core.
  • BUT the consensus core y/y is (according to Bloomberg) 2.4%. These can’t both be true except for different survey populations.
  • The weak PPI doesn’t really concern me. The components we care about, mainly health care, were not particularly weak. PPI is one of those numbers that’s all over the place. I showed this chart yesterday. Not a lot of signal through the noise.

  • But since we’re fighting over the Maginot line of 0.2%, it could well make a difference and cause a “surprise” downtick to 2.3% on core CPI this month. I think that is the whisper consensus, is an 0.1% or low 0.2% and a core number that drops slightly.
  • That would be another excuse for an equity rally although not sure whether bond guys would buy it.
  • If there’s an UPSIDE surprise, likely will come from core goods. Got all the way to flat last month, first time in a dog’s age. And this with the dollar generally strong.
  • Some are concerned about the jump in housing last mo, but that jump merely reversed the prior drop. Don’t expect re-deceleration. Home prices remain sturdy, and wage increases are starting to provide better support to household formation and therefore, housing demand.
  • As usual keep an eye on cars as an element of core goods. Last month the y/y rose to 0.84%, finally starting to reflect some of the strength of private surveys. Will it continue?
  • Pharma is also in core goods, and it dropped precipitously last month & probably will bounce. But it has been weakening generally for a while now. Even if that trend is valid, it got ahead of itself I think.
  • So, there ARE some upside risks too. Trying to see through all of that, I will be looking at core-ex-housing, which got to 1.5% last month – hasn’t been a lot higher than that in a long time.
  • But the real bottom line is this: inflation is accelerating globally and we’re seeing lots of signs of that. Core might tick down on a y/y basis today – if it doesn’t, that’s pretty bullish. But it’s going to be going higher.
  • That’s all for now…more in about 22 minutes!
  • Ouch! Soft number. 0.1% m/m on core, 2.2% on y/y.
  • 08% m/m on core.

  • 19% on core y/y. Wasn’t even a round-down. Waiting on components.
  • I gotta say, the slow-rolling of the components is starting to get ridiculous. It used to be they came out at 8:30 like everything else. It’s 8:35 and the BLS still hasn’t posted the files. Which means Bloomberg also doesn’t have them.
  • Well, they still don’t have all the data on Bloomberg but I’m pulling the BLS figures. There was a sharp drop in Apparel, -1.6% m/m, which makes little sense in a world of tariffs.
  • The big effect was a large decline in owners’ equivalent rent to 3.33% from 3.39%, which is questionable. Primary rents down slightly.
  • Also decelerations in doctors’ services and hospital services, to 0.31% from 0.64% and to 4.17% from 4.59%, respectively. Pharma didn’t bounce; it fell further to 0.77% from 0.92%.
  • Consequence of OER, doctors/hospital services is that core services inflation dropped from 3.1% to 3.0% y/y. Core goods, thanks to Apparel, fell to -0.2% from 0.0%.
  • Core goods declined even though Used Cars rose to 1.25% y/y vs 0.84% last month. Well, that’s something.
  • Boys’ apparel y/y went to -3.43% from +4.11%. All apparel decelerated (not boys & girls or men’s footwear, but everything else), but boys’ fell the most. That’s likely a seasonal effect due to placement of Labor Day and hence start of school.
  • Yeah, so here’s apparel. Evidently plunging! As a reminder we import virtually all apparel. Looking at this it’s less obviously “transitory”, but also not obvious what’s going on. With trade wars it’s simply the wrong direction.

  • Core ex-housing decelerated to 1.34% vs 1.50% last month. Not a huge move, actually, and tells you how much of this was the deceleration in OER.
  • In the grand scheme of things, OER is just hugging the model. I don’t see any reason to expect it to suddenly drop but leveling off was in the cards.

  • I mentioned the rise in used cars. New cars didn’t do much, 0.30% from 0.23%.
  • Here’s the drop in professional services (doctors). No trade effect here.

  • Tuition and fees is starting to re-accelerate…2.77% vs 2.15% y/y
  • FWIW, Median will be soft too but not THAT soft. 0.14%-0.17% depending on where OER-South Urban falls on a seasonally-adjusted basis.
  • I’m a little torn on what to think of this report. Obviously some parts are just nonsense, like the apparel bit. The OER was large for one month but not wholly unexpected. Medical Care continues to be a conundrum. Autos are finally doing what they’re supposed to do.
  • I guess my gut feeling is that aside from apparel, this is a fairly normal report and shouldn’t really change your opinion one way or the other. The 0.2% drop in the rounded core CPI was big, but it was a tougher comp.
  • Annualized 3-month core CPI is at 2% – kinda where it has been.

  • Let’s look at the four-pieces charts and see if that sways me. Food & Energy:

  • Piece 2, core goods. I don’t think this setback is serious. A lot of it is apparel and, outside of apparel, this is doing well. Pharmaceuticals are a little weak. But cars are strong. I suspect this reverses next month.

  • Piece 3, core services less shelter. Again, a little dip here on softness in medical care services, but nothing alarming to the bullish case yet.

  • Piece 4, rent of shelter. Down this month, and clearly flattening out, but that’s what we expected.

  • In sum, I think those pictures say that this was a widespread, but fairly shallow dip. It was a tough comp versus year ago. The left tail is getting heavy again, but the median isn’t moving much.

  • weight above 3%

  • Next month, the m/m dropping off is only 0.13%, so core will pop back up again especially if any of these factors reverse. Could easily get back to 2.4% although 2.3% should be the expectation. Month after that the comp is 0.21%, and then 0.12%, and then it gets tougher.
  • So this month was the lowest m/m core in a long time, but no sign of any sea change – unless Apparel is telling us that trade wars lower prices for consumers, in which case let’s do more of that!
  • It is somewhat soothing after signs last month that the trend was not only rising (higher inflation) but accelerating (rising at an increasing rate) past the prior trend.
  • But the signs from wages (which admittedly lag), the UIG, and the underlying components is that we’re not out of the woods yet. But have a relaxed month chasing stocks higher on more-dovish fed talk! This also fits into the positive bond market seasonal from Sept-Nov.
  • That’s all for today. Thanks for tuning in.

To bottom-line it: this was a soft number with some one-offs but, with the exception of the Apparel miss – and that’s just highly unlikely to be real – it seems to be broad and slightly soft, rather than narrower with things that look like potential changes in macro trends. Housing does not look poised to collapse while unemployment and wages are pointing in the right direction, and medical care isn’t going to (probably) move into outright deflation. It’s already the slowest in a couple of generations (see chart, source Bloomberg).

I think this number will make the Fed feel better, and make investors feel better, and people who don’t take the time to peel the onion might think that the Fed has won, can stop tightening, and we can just expand the economy without price pressures or any price implications from trade. That’s almost certainly wrong, but this is a good number for the market and I totally expect talking Fed heads to be sounding even more dovish than they were.

Categories: Tweet Summary

Summary of My Post-CPI Tweets (August 2018)

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

  • half hour to CPI. Welcome again to the private channel. Tell your friends!
  • Another easy comp (0.143%) versus year ago. August 2017 was +0.222%, Sep was 0.132%, Oct was 0.214%, and Nov was 0.121%. So we still have some easy comps ahead although not easy as they were. That means core should keep rising, although slower than over the last 6 mo.
  • Pretty safe economist estimate for 0.2% on core and for y/y to stay 2.3% rounded. As long as m/m core is 0.162%-0.259%, y/y will stay in that range.
  • Rents have been leveling out recently, and not providing as much upward oomph. That passes the baton to core goods and more generally to core ex-shelter.
  • Ironically, even though core goods started to accelerate before any sign of tariffs, investors I think might “look through” inflation like that, which they can explain away by saying “ha ha tariffs trump ha ha.”
  • One other item – I will be especially attentive to Median CPI this month, which jumped to 2.80% y/y last month. That looks a little like an acceleration past the prior trend (meaning 2013-2015), well past merely erasing the 2016-17 dip.
  • I should note that this month’s CPI report is being brought to you from sunny Curacao! Only 20 minutes to the number.
  • Well, 0.23% on core CPI was a bit higher than expected, but oddly got a tick higher in the y/y to 2.354%, rounding up to 2.4%. The SA y/y is still 2.3%, but NSA is 2.4%. This happens from time to time because seasonal factors change year to year.
  • Last 12 Rorschach test.

  • CPI – Used Cars and Trucks +1.31% m/m, pushing y/y to 0.84% y/y FINALLY. Private surveys have been saying this for a while.
  • Owners’ Equivalent Rent +0.29% (3.395% y/y), up from 3.37%, and primary rents +0.32% to 3.628%, up from 3.58% last month. Lodging away from home +0.4% m/m after -3.7% last month, so some give-back.
  • Core goods back to 0% y/y, first time in 5 years it has been out of deflation!
  • A fair amount of that is cars.

  • But not all is upbeat. Interestingly core services was steady at 3.1% even though Medical Care was weak across the board. Overall Med Care -0.2% m/m, making y/y 1.91% vs 2.45% last month. Pharma -0.96% m/m, 0.92% y/y vs 3.19% last month. Doctors svcs -0.17%/0.64% vs 0.86%
  • …and hospital services 0.36% m/m, 4.59% y/y, vs 4.74% last month.
  • used car chart update.

  • Not much market reaction. It is after all August. 10y breakevens up about 0.5bps from just before the figure. I think for the “look through the number” people the jump in cars is going to scream “steel tariffs” even though I think it’s more.
  • New cars y/y.

  • core ex-shelter now at 1.50%, the highest in 2 years. Inflation isn’t just in housing any more.
  • Biggest m/m declines were two apparel categories (which move around a lot) and Medical Care Commodities. Biggest gainers Public Transport, Car/Truck Rental, Jewelry/Watches, Fresh Fruits/Veggies, and Used Cars & Trucks.
  • My estimate of Median CPI is 0.224%, pushing y/y to 2.84%. Getting perilously close to 3%!
  • Four pieces: food & energy

  • Core goods – it has been a long time since core goods was meaningfully above 0%. It will happen.

 

  • Core services less Rent of Shelter. This is interesting because Medical Care Services is a big part of this and it was weak. But Core Services didn’t soften.

  • Piece 4: Rent of Shelter. Stable, high. No real chance for this to substantially slow in the near term.

 

  • I think we’ll stop there for today. All in all an interesting report as core goods is starting to show some worrying strength and core inflation outside of shelter is now getting perky too.

Really, the only important softness in this report was medical care. A lot of that was pharmaceuticals (which is in core goods), and yet core goods still accelerated to flat for the last year. But the core services part of medical care also decelerated, and core services overall didn’t drop. The weakness in medical care matters because PCE – which the Fed uses as its benchmark – exaggerates the importance of medical care so this trend will tend to keep core PCE lower relative to core CPI, and help the Fed believe they are not “behind the curve.” Yet, there are some signs that even dovish FRB members are not wholly on board with that any longer; nor should they be. For a long time, shelter has been the driving force pushing core inflation higher but that is no longer the case. The rise in core-ex-shelter to 1.5%, and the fact that core goods is about to lurch into positive territory, are both contributing to the broadening inflation trend. We see this in median inflation, which should rise again to a further post-crisis high when it is reported in a few hours.

We alternate between modest comps and easy comps for the next few months – but no really difficult comps. Measured inflation should continue to accelerate for the balance of 2018 and make the Fed’s obsession with core PCE increasingly indefensible.

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