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Summary of My Post-CPI Tweets

November 17, 2016 Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • CPI consensus is for a “soft” 0.2% on core. With 2 of the last 3 months quite low for one-off reasons, I am a little skeptical.
  • Rolling off an 0.196% m/m core from Oct 2015. Need about 0.23% to get y/y to tick back up to 2.3% on core.
  • Wow, 0.1% m/m on core and y/y goes DOWN to 2.1%! But not as impressive as that. To 3 decimals it’s 0.149% and 2.144%. Still, soft.
  • The doves just got another bullet.
  • Component breakdown very slow coming in….bls hasn’t posted data yet.
  • The overall number doesn’t mean much without the breakdown…still waiting on BLS.
  • Well, this is anticlimactic. BLS just not putting up the data. No data, no analysis.
  • Looks like a sharp fall m/m in some medical care commodities, but BLS report itself only gives 1-decimal rounding and no y/y comparisons.
  • BLS a half hour late now. Wonder if they’re all in “safe spaces” today.
  • Well, I see one reason. Apparently the BLS made an error in prescription drugs and actually revised all of the indices back to May.
  • …including the headline NSA figure. That’s an error with huge implications. It means the Tsy made wrong int payments on some TIPS.
  • NSA was 240.236, 241.038, 240.647, 240.853, and 241.428 for May-Sep. Now 240.229, 241.018, 240.628, 240.849, 241.428
  • Market guys telling me Tsy will use the old numbers for TIPS and derivatives. And hey! Look at that. BLS decided to release figures.
  • Gonna be an interesting breakdown actually. Surge in Housing and jump in Apparel, but plunge in Medical Care, Rec, & Communication.
  • Core services 3% from 3.2% y/y, core goods -0.5% from -0.6%.
  • OK! Housing 2.87% from 2.70%. BIG jump. Apparel 0.68% from -0.09%. Medical 4.26% from 4.89%. All big moves.
  • Primary Rents: 3.79% vs 3.70%; Owners’ Equiv Rent 3.45% vs 3.38%. Lodging away from home 4.37% vs 3.73%. All big jumps.
  • In Apparel (@notayesmansecon ), Women’s 0.27% vs -0.35%, but it was 1.57% 3 months ago. Girls tho: 3.06% vs 1.95%, vs -4.73% 3mo ago.
  • In Med Care: Drugs 5.24% vs 5.38% ok. Med Equip -0.79% vs -0.61% ok. Hospital Svcs 4.06% vs 5.64% !, Health Ins 6.93% vs 8.37% !.
  • Median should be about 0.16%, but median category looks like Midwest Urban OER so there’s seasonal adj I am just estimating.
  • That would keep Median at 2.49%, down from 2.54%. But all this looks temporary.
  • Core ex-housing dropped to 1.20%, lowest since last Nov. But it was as low as 0.87% last year.
  • Here is the summary: Rent of Shelter continues to rise, and actually faster than our traditional model. Services ex-Shelter decelerated.
  • Core goods continues to languish. But here’s the thing: Housing is stickier than the rest of Core Services.
  • So unless somehow hospital prices just started to drop, this isn’t as soothing as the headline.
  • That said, this is the most dovish Fed in history. If the market continues to price 90+% chance of hike, they will…but…
  • …but if we get more weak growth figures, the 2-month moderation in inflation will be enough for them to wait one more meeting.
  • Employment numbr is key. Meanwhile, infl is going to keep rising. Housing worries me. Higher wages might keep housing momentum going.
  • Here are the two categories that constitute 50% of CPI. Housing and Medical Care. Not soothing.

50pct

  • Here’s another 30%. Volatile categories we usually look through.

30pct

  • Last 20% of CPI are these 4 categories. They’re the ones to watch. Nothing too worrisome yet.

20pct

  • Here’s the FRED inflation heat map. Yeah, these were all charts that were SUPPOSED to be in my de-brief.

picture1

  • Compare distributions from last month (smaller bar on far left) and this month (bigger bar on far left).

picture2 picture3

  • More negatives, but some of the longest bar shifted higher too. More dispersion overall.

I keep coming back to the housing number. That jump is disturbing, because most folks expected housing to start decelerating. I thought it would level out too (though at a higher level than others felt – roughly where it is now, 3.5% on OER, but it’s showing no signs of fading). Here’s the reason why. It’s a chart of a model of Owners’ Equivalent Rent:

nominalhsng

This nominal model is simply the average of models based on lags of various measures of home prices. We were supposed to level off and decline some time ago…but certainly by now. And so far there’s no sign of that.

Our model is a bit more sophisticated, but if you rely on lags of nominal variables you’re going to get something like this because housing price increases have leveled off (that is, housing prices are still rising, but they’re rising at a constant, and slightly slower, rate than they were).

Now, here’s the worry. All of these models are calibrated during a time when inflation in general was low, so there’s a real chance that we’re not capturing feedback effects. That is to say, when broad inflation rises it pushes wages up faster, and that tends to support a higher level of housing inflation. We have a pretty coarse model of this feedback loop, and the upshot is that if you model housing inflation as a spread compared to overall or core inflation, rather than as a level, you get different dynamics – and dynamics that are more in tune with what seems to be happening to housing inflation. Now, it’s way too early to say that’s what’s happening here, but with housing at our forecast level and still evidently rising, it’s time to start watching.

*

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Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets

October 18, 2016 Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • CPI coming up in 14 minutes. Consensus on core is for a barely 0.2% print, (more like 0.15%). That would keep the y/y barely at 2.3%.
  • Remember to join me at 9am for a (FREE) live interactive video event at http://events.shindig.com/event/tmenduringinvestments
  • okay, core 0.1%, y/y to 2.2%. Yayy! And by the way it was only 0.11% so not close. y/y to 2.21%.
  • core rate is only 1.8% over last 3 months, vs 2.0% over last 6 and 2.2% over last 9. November tightening is wholly out.
  • Housing accelerated, Medical care roughly unch. Educ/Communication dropped. Getting breakdown now.
  • Headline was also soft. Market was 241.475 bid before the number and 241.428 was the print. Still rounded to 0.3% m/m though.
  • Bonds don’t love this as much as I thought they would. 10y note up about 4 ticks after the data.
  • 10y inflation swaps also didn’t do much. Close to 2% for first time in a long, long time.
  • Primary rents 3.70% from 3.78%, I was reading last month. But OER still up, 3.38% from 3.31%.
  • New and used cars -1.16% vs -0.95%, so more weakness there.
  • In Med care: Drugs 5.38% vs 4.59%, ouch. But prof svcs 3.22% vs 3.35%, and hospitals 5.64% vs 5.81%, and insurance 8.37% vs 9.10%.
  • But those are all retracements within trend.
  • Tuition ebbed to 2.32% vs 2.53%, and “information and info processing” -1.98% vs -0.90%. Those two add up to 7% of CPI.
  • I can see why bonds aren’t super excited. This isn’t a trend change. It looks like a pause.
  • ok, have to go get ready for the video event. See you at http://events.shindig.com/event/tmenduringinvestments … in about 10.
  • Probably good news from Median as well. I see 0.17%, bringing y/y down to 2.54% vs 2.61%. But hsg is median category so I may be off.

I covered some stuff in the Shindig event, but it’s worth showing a couple of charts. Here is health insurance. You can see the little drop this month isn’t exactly something that would make you say “whew! Glad that’s over!”

medins

This next chart, also in medical care, is the year/year change in the cost of medicinal drugs (prescription and non-prescription). Also, not soothing. And these are where the important things are happening in CPI right now.

medicinaldrugs

Finally, the big momma: Owners’ Equivalent Rent. This is not looking like it’s rolling over! And if it’s not rolling over, it’s not likely that inflation overall is rolling over.

oer

In short, the monthly weakness was enough to sooth the Fed and take them off the table for November. And, unless the next figure is really, really bad – like over 0.3% – then they’ll still say “two of the last four are soft.” The December Fed meeting, for what it’s worth, is the day before the CPI is released. The Fed won’t know that number in advance, although nowadays with “nowcasting” they’ll have a clue. But at this point, unless next month’s CPI is very high and/or the Payrolls number is very strong, I think a rate hike in December is also unlikely.

That’s good for markets in the short run. But inflation is rising, and that’s bad for markets in the medium-run!

Summary of My Post-CPI Tweets

September 16, 2016 7 comments

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • OK, 8 minutes to CPI. Street forecast is 0.14-0.15%, so a “soft” 0.2% or a “firm” 0.2% on core.
  • y/y core wouldn’t fall with that b/c last August’s core CPI was 0.12%. In fact, a clean 0.2% would cause the y/y to round up to 2.3%.
  • Either way, Fed is at #inflation target based on historical CPI/PCE spread. And arguably above it if you rely (as we do) on median.
  • Quick commercial message: our crowdfunder site for the capital raise for Enduring Investments closes in 2 weeks.
  • Commercial message #2: sign up for my articles at https://mikeashton.wordpress.com! And #3: my book!
  • Fed’s job just got a lot harder, with weaker growth but a messy inflation print. 0.25% on core, y/y rises to 2.30%.
  • And looking forward BTW, for the balance of the year we’re rolling off 0.19, 0.20, 0.18, and 0.15 from last year.
  • …so it wouldn’t be hard to get a 2.4% or even 2.5% out of core by year-end.
  • Housing rose to 2.58% y/y from 2.45%. Medical Care to 4.92% from 3.99%. Yipe. The big stories get bigger.
  • checking the markets…whaddya know?! they don’t like it.
  • starting to drill down now. Core services 3.2% from 3.1%; core goods -0.5% from -0.6%.
  • Core goods should start to gradually rise here because the dollar has remained flat for a while.
  • also worth pointing out, reflecting on presidential race: protectionism is inflationary. Unwinding the globalization dividend=bad.
  • Take apparel. Globalizing production lowered prices for 15 years 1994-2009.

apparel

  • Drilling down. Primary rents were 3.78% from 3.77%, no big deal. OER 3.31% from 3.26%, Lodging away from home 3.31% from 1.57%.
  • Lodging away from home was partly to blame for last month’s miss low. Retraced all of that this month.
  • Motor vehicles was a drag, decelerating further to -0.95% from -0.75%.
  • Medical Care: Drugs 4.67% from 3.77%. Professional svcs 3.35% from 2.86%. Hospitals 5.81% from 4.41%. Insurance 9.13% vs 7.78%
  • Insert obvious comment about effect of ACA here.
  • y/y med care highest since spike end of 2007.

medcare

  • CPI Medical – professional services highest since 2008.

prof

  • On the good news side, CPI for Tuition declined to 2.53% from 2.67%. So there’s that.
  • Bottom line: can’t put lipstick on a pig and make it pretty. This is an ugly CPI report. It wasn’t one-offs.
  • I STILL think the Fed doesn’t raise rates next week. But this does make it a bit harder at the margin.
  • Core ex-housing was 1.52%. It was higher than that for one month earlier this year (Feb), but otherwise not since 2013.

coreexshelter

As I noted, this is an ugly report. The sticky components, the ones that have momentum, continue to push inexorably higher (in the case of housing), or aggressively higher (in the case of medical care). The rise in medical care is especially disturbing. While core was being elevated mainly by shelter, it was easier to dismiss. “Yes, it’s a heavily-weighted component but it’s just one component and home-owners don’t actually pay OER out of pocket.” But medical care accelerating (especially a broad-based rise in medical care inflation), makes the inflation case harder to ignore. It is also really hard to argue – since there is a clearly-identifiable cause, and a strong economic case for why medical care prices are rising faster – that medical care inflation is resulting from some seasonal quirk or one-off (like the sequester, which temporarily pushed medical inflation down).

What makes this even more amazing is that inflation markets are priced for core and headline inflation to compound at 1.5%-1.75% for basically the next decade. That’s simply not going to happen, and the chance of not only a miss but a big miss is nonzero. I continue to be flabbergasted at the low prices of TIPS relative to nominal bonds. Sure, a real return of 0% isn’t exciting…but your nominal  bonds are almost certainly going to do worse over the next decade. I can’t imagine why anyone owns nominal bonds at these levels when inflation-linked bonds are an option.

Now, about the Fed.

This report helps the hawks on the Committee. But there aren’t many of them, and the central power structure at the Federal Reserve and at pretty much every other central bank around the world is very, very dovish. Arguably, the Fed has never been led by a more dovish Chairman. I have long believed that Yellen will need to be dragged kicking and screaming to a rate hike. Recent growth data show what appears to be a downshift in growth in an expansion that is already pretty long in the tooth, so her position is strong…unless she cares about inflation. There is no evidence that Yellen cares very much about inflation. I think the Fed believes inflation is low; if it’s rising, it isn’t going to rise very far because “expectations are anchored,” and if it does rise very far they can easily push it lower later. I think they are wrong on all three counts, but I haven’t recently held a voting position on the Committee. Or, actually, ever. Ergo, a Fed hike in my view remains very unlikely, even with this data.

Looking forward, Core and Median inflation look set to continue to rise. PCE will continue to drag along behind them, but there is no question inflation is rising at this point unless everything except PCE is wrong. In the US, core inflation has not been above 3% for twenty years. That is going to change in 2017. And that is not good news for stocks or bonds.

allup

Summary (and Extension) of My Post-CPI Tweets

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • 5 minutes to CPI. Consensus is for core to barely round to 0.2%, and for y/y core to remain at a soft 2.3%
  • I have the “over” there, but the “under” against my friend who thinks it’s gonna be 0.24%.
  • Core CPI +0.09%, y/y drops to 2.20%.
  • Waiting for the breakdown to dig deeper. Housing accelerated y/y, as did Medical care, but Apparel, Rec, Educ/comm all lower.
  • …Housing and Medical care are the big longer-term concerns so the internals might not be as weak as the headline. Taking a look now.
  • Meanwhile Dudley on the tape saying “probably don’t have to do a lot of tightening over time.” Echoes Williams. When doves cry.
  • At the same time Dudley says rate hike is possible in September. Sure, anything is possible. But not with core printing 0.1% m/m.
  • ..in Housing, Primary Rents fell to 3.77% from 3.81% y/y. OER rose to 3.26% vs 3.25%, continuing flat patterns.
  • Those are the biggest parts of housing. Lodging away from home plunged y/y. Where did the rise in housing come from? Household energy.
  • HH energy -1.37% y/y vs -3.02%. That’s 3.8% of the CPI, but not in core obviously. So housing ex-energy was basically flat.
  • Overall Medical Care category rose to 3.99% from 3.65% and 3.17% the month before that. Jumps in every category:
  • Drugs 3.77% (vs 3.40%). Equipment/supplies 0.1% (-0.62%). Prof Svcs 2.86% (2.60%). Hospital 4.41% (4.12%). Health Ins 7.78% (7.10%)
  • Large jumps everywhere in Medical Care. *Discuss.*
  • Apparel still rising y/y, at 0.35%, but won’t really take off until the dollar declines.
  • Overall, core services +3.1% (was 3.2%) and core goods -0.6% (unch).
  • Popular number is core ex-housing. 1.36% y/y vs 1.37%.
  • So overall, despite the weak m/m core number, the big trends remain in place. Housing flat to higher. Medical Care starting to ramp up.
  • A broad array of volatile components dragged m/m CPI down. But 59% of the basket is still accelerating faster than 3%.
  • Biggest monthly falls: motor fuel, car and truck rental, public transp, lodging away from home, and misc pers goods. All <-20% m/m
  • Only category over 20% annualized m/m increase was Infants and toddler’s apparel.
  • These last few facts mean that MEDIAN inflation, a better measure of inflation, will be up 0.24% or so m/m. 2.48% y/y.
  • Ugly pic #1: Health Insurance y/y

insurance

  • Ugly picture #2: medicinal drugs y/y.

drugs

  • ugly picture the worst: Medical Care overall, y/y

medicaltot

  • Owners’ Equiv Rent, largest part of CPI. Certainly high and stable. Maybe tapering? But at 3.3%! Ugly or no?

oer

  • FWIW our forecast is for OER to rise a little bit further, but less dramatically unless core ex-housing starts to move.
  • I’m not sure it’s comforting to have rents up “only” 3-4% in context of rising med care. In any event: core ain’t falling soon.
  • note that in August 2015, core was +0.12% m/m. So we’ll see some re-acceleration (and possible catch-up) next month.
  • I actually think there’s a chance for an 0.3% print next month. which would make the FOMC more interesting.
  • Right now, it’s not interesting. With m/m core at 0.09% and 3 quarters of 1% GDP, Fed not tightening in Sept.
  • Thanks for all the new follows and the re-tweets. Good time to mention a couple of things:
  • I’m thrilled to be on “What’d You Miss?” on Bloomberg TV at 3:30ET today. With @scarletfu @thestalwart and @OJRenick
  • Here’s my book: What’s Wrong With Money? The Biggest Bubble of All
  • My company, Enduring Investments, is raising a small amount of capital in the management co. Details here: https://www.crowdfunder.com/enduring-investments-llc/

So, while PPI is not usually much of a predictor of CPI, in this case it gave early warning that we were about to see a weak print from the more-important indicator. But that weakness came from a couple of smaller categories. I have shown this chart a number of times before, but I think it’s especially instructive this time. Compare the distribution of price changes in categories (by the weight in the category) this month…

distrib

To the same distribution from last October.

cpidist

Note that the left tail, which holds the laggards, has more weight this time. There is not quite as much weight in the deep deflation tail, but there are more 0% and 0.5% categories. Yes, there is also one really big increase on the right although it still doesn’t add up to much. The biggest piece of the upper tail is Health Insurance – which as you can tell from the chart above is fairly persistent. In short, I think there’s a better chance of the lower tail reverting to the mode of the distribution than there is of the upper tail doing the same. (This is why Median CPI is a better measure).

The bottom line for markets in the near-term is that nothing about this number scares policymakers. While Dudley says that September is still on the table for an FOMC tightening, the reality is that the data will present them with no urgency – even if, as I think likely, next month’s core CPI corrects for this month’s weakness. And Williams’ ridiculous paper gives them academic cover to ignore the fact that median CPI is at 2.5% and likely will continue to rise. Moreover, LIBOR has been rising because of changes in money market regulations, so FOMC members can argue that financial conditions are tightening automatically. In short, it is very unlikely in my opinion that the Fed hikes rates in September. Or November. Or December.

Summary of My Post-CPI Tweets

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

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

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

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

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets

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

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

last12

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

bfmE9AC

  • y/y in med care services – resuming uptrend

medcaresvcs

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

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

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

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

Categories: CPI, Tweet Summary

Summary of My Post-CPI Tweets

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

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

medcarecpi

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

threecat

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

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

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

coregoodsvsusd

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

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

coreCPIunder3

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

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