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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.

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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.

Summary of My Post-CPI Tweets (July 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.

  • OK, 15 minutes to CPI. Here goes.
  • Last mo, we had an 0.17% on core m/m, exactly on expectations but after a weak 0.10% in April.
  • The Dec/Jan 0.24%/0.35% seem far away, but even farther away are the 0.14%s of last June and July. That is, comps remain relatively easy.
  • Really no big surprises last month. Still haven’t seen core goods acceleration or any sign of tariff effects. Core ex-housing is rising but still quite low.
  • In fact, I think the big story going forward, not this month per se but for the balance of the year and 2019, is what happens to core goods prices. With trucking prices rising aggressively, tariffs up and globalization down, I’d expect to see movement there.
  • In that vein, keep an eye on Apparel, which though small is an important signal on core goods.
  • This month, economists are looking for 0.18% on core, pushing y/y JUST BARELY to 2.3% with rounding. The consensus nailed it last month.
  • My thesis is that we should be seeing more core inflation than that going forward. So far, that thesis has been unrewarded but I really didn’t expect a whole lot to come through until the second half. This first half was just catching up from base effects of 2017.
  • You can see that median is basically back on the slow uptrend from 2014-15-16-17. Inflation will keep rising. The only question (which would be a scary outcome) is whether it accelerates past that former trend into a new self-feeding inflation cycle. No sign of that yet.

  • Just 5 minutes til showtime.
  • 16% m/m on core, just barely pushing y/y to 2.3%, 2.255% to three decimals on the NSA core index…
  • Bloomberg being really slow posting subcomponent info.
  • Here’s the last 12 core CPIs. Certainly nothing seems terribly alarming here on the surface.

  • OK, Bloomberg. Gonna scrape the data myself. BRB.
  • Breakevens are unimpressed. 10y breaks were +1 before the number, mostly a reaction to the energy plunge and rebound, and are +0.5 now. But sometimes takes a bit for people to dive into the numbers.
  • ..so we see Used cars and trucks are +0.72% m/m, yay! Finally some movement. Still -0.66% y/y, so not showing the inflation of the private surveys. Private surveys have noted some shift in used car composition, and it may be that the BLS just isn’t correcting for that.
  • Owners’ Equivalent Rent was +0.25% m/m for the second month in a row, but that caused y/y to decelerate to 3.37% from 3.41%. That’s interesting because last month the rise in OER was a big chunk of the rise that we got so…something else was moving this month.
  • Primary Rents also decelerated, to 3.58% from 3.63%. That’s actually lower than the y/y has been for a while as this continued to decelerate. But it’s not going to collapse while housing prices continue to boom.
  • Medical Care accelerated further, to 2.45% from 2.38% y/y. That’s not as big a jump as last month, but it’s the right sign. Still low. Pharma retreated a bit but doctor’s services picked up the slack.

  • Apparel dropped on the month, pushing y/y down to 0.6% from 1.4%. So canary on core goods is still chirping.
  • Bloomberg still hasn’t updated the core goods and core commodities figures…odd. Anyway, they’re -0.2% on core goods (tiny acceleration) and 3.1% on core services (tiny acceleration) on a y/y basis.
  • Lodging Away from Home, which surged last month to 4.4% y/y, plunged to 1.6% y/y this month.
  • Core ex-shelter rose to 1.41%, highest since mid-2016. That’s still low, but it’s what we want to watch along with core goods. It hasn’t been above 2% since 2012. Hasn’t even been close.

  • This is interesting…wireless telephone services inflation is positive. It’s not like that NEVER happens but this time we might go higher. After you go to infinite data…how do you improve quality dramatically? And it’s quality that drives this series lower.

  • Core goods’ rise is encouraging for inflation…but still a ways to go before it gets to +1%. However it’s on model at the moment.

  • Will have the four-pieces charts in a moment. But while I’m waiting on the calculator…this month’s data is interesting because it was not housing. Some of the rise in core was due to new and used cars rebounding, but not enough to offset the deceleration in housing. >>
  • That may mean that inflation is broadening to more categories outside of the ones that have been driving inflation for a while. Core ex-shelter’s rise is something to watch. That’s what inflation actually looks like – it’s not dramatic, and not isolated in a few categories.
  • inflation markets are tres unimpressed. 10y breakevens now down on the day.
  • We’re not really seeing a broadening in this diffusion measure, so it may just be that the left-tail deflationary stuff is going away. A tightening of the distribution, that is.

  • OK four pieces. Piece 1: Food & Energy. Good for owners of TIPS, but mean-reverting so we mostly ignore for forecasting.

  • Core goods, Piece 2, I’ve already shown. Rising and will keep rising.

  • Piece 3: Core services less rent of shelter. Starting to look interesting. The 3% level is key.

  • Piece 4: Rent of Shelter. Still elevated. It’s done the heavy lifting on inflation for a while and probably won’t do much more for a while. Continued acceleration in core will rely on ex-shelter core services, and on core goods. Both of which seem to be rising.

  • Bottom lining: Once again, no big surprises here and nothing that will alter the Fed’s trajectory. But the underlying pressures here are pretty clear and show no signs of waning. We are not going to gently converge on 2% core PCE.
  • What I said at the beginning remains the key question: are we just going back to the rising – but slowly rising – inflation trend from 2014-2017, or will we start to accelerate above that trend?
  • Acceleration above that trend would be very concerning, unless it was caused by one-offs (like cell phones and other one-offs caused the 2017 departure on the downside). It would indicate that inflation has moved into a self-reinforcing phase.
  • I suspect that’s where we are headed. But so far, the evidence that we are there doesn’t exist (there’s no contrary evidence either – it’s just unknown at this point).
  • Early look at median…my estimate is 0.23% m/m. If I am right, this takes the y/y to 2.80%. This will be really dramatic!
Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets (June 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. Until the end of June, you can get $9.99 off (one month free, or a discount off the already-discounted annual plan) by using code “tryme”. 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.

  • 27 minutes to CPI! Here are my pre-figure thoughts:
  • Last month (April CPI) was a big surprise. The 0.098% rise in core was the lowest in almost a year, rewarding those economists who see this recent rise as transitory. (I don’t.)
  • But underneath the headlines, April CPI was nowhere near as weak as it seemed. The sticky prices like housing were stronger and much of the weakness came from a huge drop in Used Cars and Trucks, which defied the surveys.
  • Medical Care and Apparel were also both strong last month.
  • Now, BECAUSE the weakness was concentrated in a small number of categories that had large moves, median inflation was still +0.24% last month, which drives home the fact that the underlying trend is much stronger than 0.10% per month.
  • The question this month is: do we go back to what we were printing, 0.18%-0.21% per month (that’s the 2 month and 6 month avg prior to last month, respectively), or do we have a payback for the weak figure last month?
  • To reiterate – there were not really any HIGH SIDE upliers to potentially reverse. Maybe housing a touch, but not much. To me, this suggests upside risk to the consensus [which is around 0.17% or so and a bump up (due to base effects) to 2.2% y/y].
  • I don’t make monthly point forecasts, but I would say there’s a decent chance of an 0.21% or better…which number matters only since it would accelerate the y/y from 2.1% to 2.3% after rounding. So I agree with @petermcteague here, which is a good place to be.
  • Note there’s also the ongoing risk each month of seeing tariffs trickle through or trucking pressures start to diffuse through to other goods prices. Watch core goods.
  • So those are my thoughts. Put it this way though – I don’t see much that would cause the Fed to SLOW the rate hike plans, at least on the inflation side. Maybe EM or something not US economy-related, but we’d have to have a shockingly broadly weak number to give the FOMC pause.
  • Starting to wonder why we even both with an actual release. Economists nailed it, 0.17% m/m on core, 2.21% y/y.
  • That’s a 2.05% annualized increase. Which would be amazing if the Fed could nail that every month.

  • Core goods accelerated to -0.3% from -0.4%, so the jump there hasn’t happened. Core services moved up to 3.0% from 2.9%. That is the highest core services since Feb 2017, but not absurd.
  • still waiting on core goods acceleration…

  • Used cars and trucks again dropped sharply. -0.89% after -1.59% last month. That’s m/m. The y/y is -1.68%. Again, that’s at odds with all of the private surveys and is a big disconnect. I can’t explain it.
  • Owners’ Equiv Rent put in another solid month +0.25% m/m, up to 3.41% y/y. Starting to get a bit ahead of our model again.

  • Large jump in lodging away from home, 2.93% m/m. That takes the y/y to 4.29%. LAFH is only 0.9% of CPI, but that’s an outlier that will probably come back next month.
  • Medical Care scored a solid 0.2%, accelerating to 2.38% y/y.

  • Pharma (3.73% vs 2.65%), Doctor’s Services (0.55% vs 0.31%), and Hospital Services (4.74% vs 4.49%) all accelerated.
  • Apparel was flat on the month, but that moved y/y up to 1.4% vs 0.8%.
  • Neither stocks nor breakevens care about this figure. Summer has set in. It used to be that the summer lull was a couple of weeks in August. Then it went to all of August as the US mirrored Europe. Now it pretty much starts in June and lasts until Labor Day.
  • I forgot to mention Primary Rents, by the way. They actually decelerated to 3.63% y/y from 3.70%, which takes some the sting out of a potential OER reversal. The Primary Rents move was countertrend so it should also retrace next month. But only 1/3 of the weight of OER.
  • The Primary Rents move does tend to reinforce the message of our model, that OER is a tiny bit out over its skis. However as that chart illustrated, it can diverge a bunch from our model.
  • Biggest m/m declines were in Car and Truck Rental and Public Transportation (what’s up with vehicles??), followed by Mens and Boys’ Apparel. I’ve mentioned Used Cars and Trucks. Household Furnishings also weak.
  • Biggest m/m increases are the aforementioned Lodging Away from Home, Infants and Toddlers’ Apparel, Motor Fuel, and Medical Care Commodities (mostly Pharma).
  • All of the median categories are Rent and OER subcategories which are hard to get a read on, but median should again be mid-0.2s, probably 0.26-0.27% m/m pushing y/y to nearly 2.7% on Median CPI! Last mo was highest since 1/09; this would be highest since 2008.
  • This is median BEFORE today’s figure, which will come later. And I could be wrong about it.

  • Core ex-housing, something worth watching especially since housing seems back in an uptrend, rose to 1.29% from 1.21%. That’s the highest since Jan 2017, but it hasn’t been higher than 1.61% since early 2013. Right now can still claim it’s a housing story.
  • Putting together the four-pieces charts.
  • Still not much action in inflation markets. From the swap curve: US #Inflation mkt pricing: 2018 2.2%;2019 2.2%;then 2.3%, 2.4%, 2.4%, 2.4%, 2.5%, 2.5%, 2.4%, 2.5%, & 2028:2.5%.
  • Four Pieces: Food & Energy first. Roughly 21% of CPI.

  • Core Goods, about 19% or so of CPI. Rising very slowly. If core inflation is to reach ‘escape velocity’ this needs to rise a fair amount. Tariffs will help that, eventually.

  • Core services, less rent of shelter. About 27% of overall CPI. Lot of medical care here, which as we expected has been pulling this higher. Again, for CPI to reach escape velocity you’d want to see this above 3%.

  • And the big kahuna, housing, about 1/3 of overall CPI. Had a steady run-up, got ahead of itself and came back to model, and now is accelerating again. Housing indeed looks tight, and this should continue especially if wages continue to accelerate.

  • Diffusion look at inflation is still pretty dull. Slightly less than half of all categories of CPI are accelerating faster than 3%. But that’s been very consistent between 40% and 50% (obviously at ~50%, median CPI would be at 3%).

  • OK, last overall point. May was an easy hurdle to get an acceleration in y/y, as May 2017 was only +0.08. June and July of last year were both +0.143%, so again we should see more acceleration. Y/y core CPI should be at 2.3% next mo & hit 2.4% in Sept just on base effects.
  • …that’s merely assuming 0.2% per month from core CPI, which is between what TTM core says it is and what median stays it is. If we print just a smidge above 0.2% per month we could hit 2.5% in November. Again, that’s assuming no big acceleration in underlying pressures.
  • I happen to believe there ARE some underlying pressures so I think we’ll hit 2.5% sooner than that and median will press 3%. Nothing super alarming for the Fed, but somewhat discomfiting. The real test will be once we hit Dec and Jan and those hard comps.
  • That’s all for today. Thanks for tuning in, and thanks for subscribing to the modestly-priced premium channel. I really appreciate your voting with your dollars in this way!

Breakevens eventually did care a little bit, rising a tick or so. Market-wise, today’s number continues to do two things. First, it doesn’t really give any reason for the Fed to arrest or delay its current plans to gradually hike overnight rates. There was no surprise here – this is still all very much in the realm of base effects as we drop off the strange deceleration from last year. Second, there’s really no reason for interest rates in the US to stay below 3%. In an expanding economy with accelerating inflation which is already at 2.2%, or 2.7% on median, a 3% nominal yield makes little sense. Real yields, and nominal yields, are too low. So, honestly, are breakevens…inflation swaps are showing forward expected inflation rates of no more than 2.5% out for many years, even though median inflation (and headline inflation!) is already above that level. You have to have a great deal of faith in an untested hypothesis – the idea that inflation expectations will be ‘anchored’ and overwhelm any effects from tariffs, actual production bottlenecks, and monetary largesse, to keep inflation low and steady – to be actively shorting inflation at these levels, and if you’re buying Treasuries at yields below 3% you are actively betting on inflation declining.

If it seems a strange time to be making that bet, I agree with you. But market sentiment is clearly biased in favor of a belief that the weather will always be sunny and warm and that neither inflation nor commodities will go higher, or equities or bonds lower, from these levels. The contrary evidence about inflation, anyway, continues to build and to my mind it requires an increasing effort of will to ignore that evidence.

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