Below is a summary of my post-CPI tweets. ou 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.
- Core CPI prints +0.145…just misses printing +0.2, which will make it seem weak. We will see the breakdown.
- y/y core goes to 1.73% from 1.81%. A downtick there was very likely because we were dropping off +0.23%
- This decreases odds of Sept Fed hike (I didn’t think likely anyway) but remember we have a couple more cpi prints so don’t exaggerate.
- Core goods (-0.3% from -0.2%) and core services (2.4% from 2.5%) both declined. Again, some of that is base effects.
- fwiw, next few months we drop off from core CPI: +0.137%, +0.098%, +0.052%, and +0.145%. So y/y core will be higher in a few months.
- INteresting was housing declined to 1.9% from 2.2% y/y. But it was all Lodging away from home: 0.96% from 5.1% y/y!
- Gotta tell you I am traveling now and that reminds you the difference between rate and level. Hotels are EXPENSIVE!
- Owners’ Equiv Rent +2.79% from 2.77%. Primary Rents 3.47% unch. So the main housing action is still up. And should continue.
- Remember the number we care about is actually Median CPI, a couple hours from now. That should stay 0.2 and around 2.2% y/y.
- At root, this isn’t a very exciting CPI figure. It helps the doves, but that help will be short-lived. Internals didn’t move much tho.
The last remark sums it up. While the movement in Lodging Away from Home made it briefly look like there was some weakness in housing, I probably would have dismissed that anyway. There’s simply too much momentum in housing prices for there to be anything other than accelerating inflation in that sector. We have a long way to go, I think, before we have any topping in housing inflation.
But overall, this was a fairly boring figure. While the year-on-year core CPI print declined, that was due as I mentioned to base effects: dropping off a curiously strong number from last year. (That said, this month’s core CPI definitely calms things a bit after last month’s upward surprise). However, the next few base effect changes will push y/y core CPI higher. While today’s data will be welcomed by the doves, by the time of the September meeting the momentum in core inflation will be evident and median inflation is likely to be heading higher as well.
Note that I don’t think the Fed tightens in September even with a core CPI at 2% or above, but the bond market will get very scared about that between now and then. Could be some rough sledding for fixed income later in the summer. But not for now!
Here 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.
- CPI Day! Exciting. The y/y for core will “drop off” +0.20% m/m from last yr, so to get core to 1.9% y/y takes +0.29 m/m this yr.
- Consensus looks for a downtick in core to 1.7% y/y (rounding down) instead of the rounded-up 1.8% (actually 1.754%) last mo.
- oohoooooo! Core +0.3% m/m. y/y stays at 1.8%. Checking rounding.
- +0.256% m/m on core, so the 0.3% is mostly shock value. But y/y goes to 1.81%, no round-assist needed.
- Headline was in line with expectations, -0.2% y/y. Big sigh of relief from dealers holding TIPS inventory left from the auction.
- Core ex-shelter was +0.24%, biggest rise since Jan 2013. That’s important.
- This really helps my speaking engagement next mo – a debate between pro & con inflation positions at Global Fixed Income Institute. :-)
- More analysis coming. But Excel really hates it when you focus on another program while a big sheet is calculating…
- It’s still core services doing all the heavy lifting. Core goods was -0.2% y/y (unch) while core services rose to 2.5% y/y.
- Core services has been 2.4%-2.5% since August.
- Owners’ Equivalent Rent rose to 2.77% y/y, highest since…well, a long time.
- Thanks Excel for giving me my data back. As I said, OER was 2.77%, up from 2.69%. Primary rents frll to 3.47% from 3.53%.
- Housing as a whole went to 2.20% y/y from 1.93%, which is huge. Some of that was household energy but ex-energy shelter was 2.67 vs 2.56
- Or housing ex-shelter, ex-energy was 1.14% from 0.67%. Seems I am drilling a bit deep but getting housing right is very important.
- Medical Care +2.91% from 2.46%. Big jump, but mostly repaying the inexplicable dip from Q1. Lot of this is new O’care seasonality.
- Median is a bit of a wildcard this month. Looks like median category will be OER (South Urban), so it will depend on seasonal adj.
- But best guess for median has been 0.2% for a while. Underlying inflation is and has been 2.0%-2.4% since 2011.
- And reminder: it’s median that matters. Core will continue to converge upwards to it, (and I think median will go higher.)
- None of this changes the Fed. They’re not going to hike rates for a long while. Growth is too weak and that’s all they care about.
- For all the noise about the dual mandate, the Fed acts as if it only has one mandate: employment (which they can’t do anything about).
- The next few monthly core figures to drop off are 0.23%, 0.14%, 0.10%, and 0.05%.
- So, if we keep printing 0.22% on core, on the day of the Sep FOMC meeting core CPI will be 2.2% y/y, putting core PCE basically at tgt.
- I think this is why FOMC doves have been musing about “symmetrical misses” and letting infl scoot a little higher.
- US #Inflation mkt pricing: 2015 1.1%;2016 1.8%;then 1.8%, 2.0%, 2.0%, 2.1%, 2.2%, 2.3%, 2.4%, 2.5%, & 2025:2.4%.
- For the record, that is the highest m/m print in core CPI since January 2008. It hasn’t printed a pure 0.3% or above since 2006.
There is no doubt that this is a stronger inflation print than the market expected. Although the 0.3% print was due to rounding (the first such print, though, since January 2013), the month/month core increase hasn’t been above 0.26% since January 2008 and it has been nearly a decade since 0.3% prints weren’t an oddity (see chart, source Bloomberg).
You can think of the CPI as being four roughly-equal pieces: Core goods, Core services ex-rents, Rents, and Food & Energy. Obviously, the first three represent Core CPI. The breakdown (source: BLS and Enduring Investments calculations) is shown below.
Note that in the tweet-stream, I referred to core services being 2.4%-2.5% since August. With the chart above, you can see that this was because both pieces were pretty flat, but that the tame performance overall of core services was because services outside of rents was declining while rents were rising. But core services ex-rents appear to have flattened out, while housing indicators suggest higher rents are still ahead (Owners’ Equivalent Rent, the bigger piece, went to 2.77%, the highest since January 2008). Core goods, too, look to have flattened out and have probably bottomed.
So the basic story is getting simpler. Housing inflation continues apace, and the moderating effects on consumers’ pocketbooks (one-time medical care effects, e.g., which are now being erased with big premium hikes) are ebbing. This merely puts Core on a course to re-converge with Median. If core inflation were to stop when it got to median, the Fed would be very happy. The chart below (Source: Bloomberg) supports the statement I made above, that median inflation has been between 2% and 2.4% since 2011. Incidentally, the chart is through March, but Median CPI was just released as I type this, at 2.2% y/y again.
But that gentle convergence at the Fed target won’t happen. Unless the Federal Reserve acts rapidly and decisively, not to raise rates but to remove excess reserves from the banking system (and indeed, to keep rates and thereby velocity low while doing so, a mean trick indeed), inflation has but one way to go. Up. And there appears little risk that the Fed will act decisively in a hawkish fashion.
Below you can find a recap and extension of my post-CPI tweets. You can 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.
- Core CPI+0.23% m/m is the story, with y/y upticking to 1.754% (rounded to +1.8%). This was higher than expected, by a smidge.
- Core services +2.4% y/y down from 2.5%. But core goods -0.2%, up from -0.5% last mo and -0.8% two months ago. Despite dollar strength!
- Core ex-housing rose to 0.91% y/y from 0.69% at the end of 2014. Another sign core inflation has bottomed and is heading back to median.
- The m/m rise of 0.20% in core ex-shelter was the highest since Jan 2013.
- Primary rents 3.53% y/y from 3.54%; OER 2.693% from 2.687%. Zzzzz…story today is outside of housing, which is significant.
- Accelerating major groups: Apparel, Transport, Med Care, Recreation (32.1% of index). Decel: Food/Bev, Housing, Educ/Comm, Other (67.9%)
- …but again, in housing the shelter component (32.7% of overall CPI) was unch at ~3% while fuels/utilities plunged to -2.26% from flat.
- [in response to a question “Michael we have been scratching our heads on this one… is it some impact of port strike do you think?”] @econhedge I don’t think so. But core goods was just too low. Our proxy says this is about right.
- @econhedge w/in core goods, Medical commodities went to 4.2% from 3.9%, new cars from 0.1% to 0.3%, and Apparel to -0.5% from -0.8%.
- @econhedge so you can argue Obamacare effect having as much impact as port strike. But it’s one month in any case. Don’t overanalyze. :-)
- Medicinal drugs at 4.46% y/y. In mid-2013 it was flat. That was a big reason core CPI initially diverged from median. Sequester effect.
- @econhedge Drugs 1.70%, med equip/supplies 0.08% (that’s percentage of overall CPI). 8.7% and 0.4% of core goods, respectively.
- Median should be roughly 0.2%. I have it up 0.21% m/m and 2.22% y/y, but I don’t have the right seasonals for the regional OERs.
- Further breakdown of medical care commodities: the biggest piece was prescription drugs, +5.74% y/y vs 5.19%. The other parts were lower.
The main headline of the story is that core inflation rose the most month-over-month since May. After a long string of sub-0.2% prints (that sometimes rounded up), this was a clean print that would annualize to 2.7% or so. And it is no fluke. The rise was broad-based, with 63% of the components at least 2% above deflation (see chart, source Enduring Investments, and keep in mind that anything energy-related is not part of that 63%) and nearly a quarter of the basket above 3%.
This is no real surprise. Median has consistently been well above core CPI, which implied some “tail categories” were dragging down core CPI. These tail categories are still there (see chart, source Enduring Investments), but less than they had been (compare to chart here). Ergo, core is converging upward to median CPI. As predicted.
The next important step in the evolution of inflation will be when median inflation turns decisively higher, which we think will happen soon. But that being said, a few more months of core inflation accelerating on a year/year basis will get the attention of the moderates on the Federal Reserve Board. I don’t think it will matter until the doves also take notice, and this is unlikely to happen when the economy is slowing, as it appears to be doing. I don’t think we will see a Fed hike this year.
The following is a summary of my post-CPI tweets. You can follow me @inflation_guy (or follow the tweets on the main page at https://mikeashton.wordpress.com)
- Core CPI +0.14%, close to rounding to +0.2%. An 0.2% would have caused a panic in TIPS, where there have been far more sellers recently.
- y/y core to 1.73%, again almost rounding to 1.8% versus 1.7% expected. This just barely qualifies as being “as expected”, in other words.
- Core services fell to 2.4%, but core goods rose to -0.3% y/y.
- OER re-accelerated to 2.71% from 2.68% y/y. It will go higher.
- really interesting that core goods did not weaken MORE given dollar strength. $ strength is overplayed by inflation bears.
- Apparel went to 0.5% y/y from 0.0%. That’s the category probably most sensitive directly to dollar movements b/c apparel is all overseas.
- Accel major groups: Food/Bev, Apparel, Recreation (24.1% of basket). Decel: Housing, Transp, Med Care, Educ/Comm (72.5%).
- Though note that in housing, Primary rents rose from 3.18% to 3.29%, and OER from 2.68% to 2.71%, so weakness is mostly household energy.
- That’s a new high for primary rental inflation. Lodging away from home also went to new high, 5.04% y/y. But it’s choppier.
- Airfares continued to decelerate, -3.01% from -2.71%. Ebola scares can’t have helped that category, which most expected to rebound.
- But these days, airfares are very highly correlated to fuel prices (wasn’t always the case). [ed note: see chart below]
- In Medical Care, pharmaceuticals rose to 3.08% from 2.72%. But the medical services pieces decelerated.
- Decel in med services is the surprise these days as the passage of the sequester cause positive base effects.
- The weakness in med services holds down core PCE, too. Median CPI continues to be a better measure as a result.
- College tuition and fees 3.36% from 3.32%. Still low compared to where it’s been. Strong markets help colleges hold down tuitions.
- Core CPI ex-housing partly as a result of continued medical care weakness is down to a new low 0.877% from 0.911%.
- That continues to be the horse race: housing versus a wide variety of other things not inflating. Yet.
We may hear about how this CPI report shows that there is “still no inflation,” but the simple fact is that the report was a little stronger-than-expected, that shelter inflation continues to accelerate with no end in sight, and that there was no large effect seen in core inflation from the strength of the dollar. The dollar has an evident effect on energy commodities, and a lesser effect on other commodities, but once you get to finished goods it takes a larger FX move or one longer in duration than the modest dollar rally we have had so far to cause meaningful movements in inflation.
The dollar’s strength, reflecting in energy weakness, also shows up in some categories where we don’t fully appreciate the link to energy. The airfares connection is always one of my favorites to show. Prior to 2004, there was basically no correlation between airfares and jet fuel prices (vertical part of the chart below). After 2004, the correlation went to basically 1.0 (see chart, source Enduring Investments).
The real conundrum in the CPI right now is the medical care piece. We always knew there would be difficulties in extracting what is really going on in medical care once Obamacare kicked in, because many of the costs of that program don’t show up immediately as consumer costs. But the main effect in the data all last year was the effect of the sequester on Medicare payments, which pushed down Medical Care inflation from over 4% in mid-2012 to 2% in 2013. But as the sequester passed out of the data, Medical Care CPI rose to nearly 3% earlier this year…and then slipped, abruptly, back to the lows (see chart, source Bloomberg).
Is it possible that Obamacare is really restraining consumer inflation for medical care? Sure, it is possible. But there is far too much noise at this point to know what is happening in that component. And it really matters, because the overweighting of medical care and underweighting of housing in core PCE is the main reason that the Fed-favored price index shows 1.5% while median CPI is at 2.2%, within a snick of the highs since the crisis (see chart, source Bloomberg – note median CPI isn’t out yet for September).
From a markets perspective, the TIPS market (and the commodities market, for that matter) have been pricing in a pernicious disinflation and/or deflationary pressure. It is simply not there. And so, even with a print that couldn’t reach 0.2% on core, and even heading into a big auction tomorrow, inflation breakevens are rallying nicely, up 3.5-4.5bps across the board. Imagine what they would have done with a print that was a bona fide strong print!
Heading into the CPI print tomorrow, the market is firmly in “we don’t believe it” mode. Since the CPI report last month – which showed a third straight month of a surprising and surprisingly-broad uptick in prices – commodity prices are actually down 4% (basis the Bloomberg Commodity Index, formerly known as the DJ-UBS Commodity Index). Ten-year breakeven inflation is up 1-2bps since then, but there is still scant sign of alarm in global markets about the chances that the inflation upswing has arrived.
Essentially, no one believes that inflation is about to take root. Few people believe that inflation can take root. Indeed, our measure of inflation angst is near all-time lows (see chart, source Enduring Investments).
…which, of course, is exactly the reason you ought to be worried: because no one else is, and that’s precisely the time that often offers the most risk to being with the crowd, and the most reward from bucking it. And, with 10-year breakevens around 2.22%, the cost of protecting against that risk is quite low.
I suspect that one reason some investors are less concerned about this month’s CPI is that some short-term indicators are indicating that a correction in prices may be due. For example, the Billion Prices Project (which is now Price Stats, but still makes a daily series available at http://bpp.mit.edu/usa/) monthly inflation chart (shown below) suggests that inflation should retreat this month.
However, hold your horses: the BPP is forecasting non-seasonally-adjusted headline CPI. The June seasonals do have the tendency to subtract a bit less than 0.1% from the seasonally-adjusted number, which means that it’s not a bad bet that the non-seasonally-adjusted figure will show a smaller rise from May to June than we saw April to May, or March to April. Moreover, the BPP and other short-term ‘nowcasts’ of headline inflation are partly ebbing due to the recent sogginess in gasoline prices, which are 10 cents lower (and unseasonally so) than they were a month ago.
But that does not inform on core inflation. The last three months’ prints of seasonally-adjusted core CPI have been 0.204%, 0.236%, and 0.258%, which is a 2.8% annualized pace for the last quarter…and accelerating. Moreover, as I have previously documented the breadth of the inflation uptick is something that is different from the last few times we have seen mild acceleration of inflation.
None of that means that monthly core CPI will continue to accelerate this month. The consensus forecast of 0.19% implies year/year core CPI will accelerate, but will still round to 2.0%. But remember that the Cleveland Fed’s Median CPI, to which core CPI should be converging as the sequester/Medical Care effect fades, is at 2.3% and rising. We should not be at all surprised with a second 0.3% increase tomorrow.
But, judging from markets, we would be.
This is not to say I am forecasting it, because forecasting one month’s CPI is like forecasting a random number generator, but I think the odds of 0.3% are considerably higher than 0.1%. I am on record as saying that core or median inflation will get to nearly 3% by year-end, and I remain in that camp.
Following is a summary of my post-CPI tweets. You can follow me @inflation_guy!
- Well, I hate to say I told you so, but…increase in core CPI biggest since Aug 2011. +0.3%, y/y up to 2.0% from 1.8%.
- Let the economist ***-covering begin.
- Core services +2.7%, core goods still -0.2%. In other words, plenty of room for core to continue to rise as core goods mean-reverts.
- (RT from Bloomberg Markets): Consumer Price Inflation By Category http://read.bi/U60bLJ pic.twitter.com/R2ufMjVRRM
- Major groups accel: Food/Bev, Housing, Apparel, Transp, Med Care, Other (87.1%) Decel: Recreation (5.8%) Unch: Educ/Comm (7.1%)
- w/i housing, OER only ticked up slightly, same with primary rents. But lodging away from home soared.
- y/y core was 1.956% to 3 decimals, so it only just barely rounded higher. m/m was 0.258%, also just rounding up.
- OER at 2.64% y/y is lagging behind my model again. Should be at 3% by year-end.
- Fully 70% of lower-level categories in the CPI accelerated last month. That’s actually UP from April’s very broad acceleration.
- That acceleration breadth is one of the things that told you this month we wouldn’t retrace. This looks more like an inflation process.
- 63% of categories are seeing price increases more than 2%. Half are rising faster than 2.5%.
- Back of the envelope says Median CPI ought to accelerate again from 2.2%. But the Cleveland Fed doesn’t do it the same way I do.
- All 5 major subcomponents of Medical Care accelerated. Drugs 2.7% from 1.7%, equip -0.6% from -1.4%, prof svs 1.9% from 1.5%>>>
- >>>Hospital & related svcs 5.8% from 5.5%, and Health insurance to -0.1% from -0.2%. Of course this is expected base effects.
- Always funny that Educ & Communication are together as they have nothing in common. Educ 3.4% from 3.3%; Comm -0.24% from -0.18%.
This was potentially a watershed CPI report. There are several things that will tend to reduce the sense of alarm in official (and unofficial) circles, however. The overall level of core CPI, only just reaching 2%, will mean that this report generates less alarm than if the same report had happened with core at 2.5% or 3%. But that’s a mistake, since core CPI is only as low as 2% because of one-off effects – the same one-off effects I have been talking about for a year, and which virtually guaranteed that core CPI would rise this year toward Median CPI. Median CPI is at 2.2% (for April; it will likely be at least 2.3% y/y from this month but the report isn’t out until mid-day-ish). I continue to think that core and median CPI are making a run at 3% this calendar year.
The fact that OER and Primary Rents didn’t accelerate, combined with the fact that the housing market appears to be softening, will also reduce policymaker palpitations. But this too is wrong – although housing activity is softening, housing prices are only softening at the margin so far. Central bankers will make the error, as they so often do, of thinking about the microeconomic fact that diminishing demand should lower market-clearing prices. That is only true, sadly, if the value of the pricing unit is not changing. Relative prices in housing can ebb, but as long as there is too much money, housing prices will continue to rise. Remember, the spike in housing prices began with a huge overhang of supply…something else that the simple microeconomic model says shouldn’t happen!
Policymakers will be pleased that inflation expectations remain “contained,” meaning that breakevens and inflation swaps are not rising rapidly (although they are up somewhat today, as one would expect). Even this, though, is somewhat of an illusion. Inflation swaps and breakevens measure headline inflation expectations, but under the surface expectations for core inflation are rising. The chart below shows a time-series of 1-year (black) and 5-year (green) expectations for core inflation, extracted from inflation markets. Year-ahead core CPI expectations have risen from 1.7% to 2.2% in just the last two and a half months, while 5-year core inflation expectations are back to 2.4% (and will be above it today). This is not panic territory, and in any event I don’t believe inflation expectations really anchor inflation, but it is moving in the “wrong” direction.
But the biggest red flag in all of this is not the size of the increase, and not even the fact that the monthly acceleration has increased for three months in a row while economists keep looking for mean-reversion (which we are getting, but they just have the wrong mean). The biggest red flag is the diffusion of inflation accelerations across big swaths of products and services. Always before there have been a few categories leading the way. When those categories were very large, like Housing, it helped to forecast inflation – well, it helped some of us – but it wasn’t as alarming. Inflation is a process by which the general price level increases, though, and that means that in an inflationary episode we should see most prices rising, and we should see those increases accelerating across many categories. That is exactly what we are seeing now.
In my mind, this is the worst inflation report in years, largely because there aren’t just one or two things to pin it on. Many prices are going up.
The following is a summary of my post-CPI tweets. You can follow me @inflation_guy.
- Core CPI +0.12%, a bit lower than expected.
- Core 1.56% y/y
- Both core services and core goods decelerated, to 2.2% y/y and -0.4% y/y. This is highly surprising and at odds with leading indicators.
- Accelerating groups: Food/Bev, Housing, Med Care (63.9%). Decel: Apparel, Transp,Recreation, Educ/Comm (32.7%). “Other” unch
- Primary rents fell to 2.82% y/y from 2.88%, OER 2.51% from 2.52%.
- Primary rents probably fell mainly because of the rise in gas prices, which implies the non-energy rent portion is lower.
- …but that obviously won’t persist. It’s significantly a function of the cold winter. Primary rents will be well into the 3s soon.
- Household energy was 0.7% y/y at this time last year; now it’s 5.5%. Again, that slows the increase in primary rents
- Medical Care moved higher again, slowly reversing the sequester-induced decline from last yr. Drugs +1.86% y/y from 0.91% last month.
- Core ex-housing leaked lower again, to only 0.84% y/y. Lowest since 2004. If you want to worry about deflation, go ahead. I don’t.
- The Enduring Inflation Angst Index rose to -0.51%, highest since Nov 2011 (but still really low).
I must admit to some mild frustration. Our call for higher primary rents and owners’ equivalent rents has finally been shown to be correct, as these two large components of consumption have been heading higher over the last few months (the lag was 3-4 months longer than is typical). But core inflation, despite this, has stubbornly refused to rise, as a smattering of small-but-important categories – largely in the core goods part of CPI – are weighing on the overall number.
It is also almost comically frustrating that some of the drag on core CPI is happening because of the recent rise in Natural Gas prices, which has increased the imputed energy component of primary rents. As a reminder, the BLS takes a survey of actual rents, but since utilities are often included in rental agreements the BLS subtracts out the changing value of that benefit that the renter gets. So, if your rent last December was $1,000, and your utilities were $100, and your rent this month is still $1,000 but utilities are $125, then the BLS recognizes that you are really paying $25 less for rent. Obviously, this only changes where price increases show up – in this example, overall housing inflation would be zero, but the BLS would show an increase in “Household Energy” of 25% and a decline in “Rent of Primary Residence” of 2.78% (which is -$25/$900). But “Household Energy” is a non-core component, while “Rent of Primary Residence” is a core component…suggesting that core inflation declined.
There isn’t much we can do about this. It’s clearly the right way to do the accounting, but because utility costs vary much more than rental costs it induces extra volatility into the rental series. However, eventually what will happen is either (a) household energy prices will decline again, causing primary rents to recover the drag, or (b) landlords will increase rents to capture what they see as a permanent increase in utilities prices. So, in the long run, this doesn’t impact the case for higher rents and OER – but in the short run, it’s frustrating because it’s hard to explain!
Now, core inflation outside of housing is also stagnant, and that’s surprising to me. Apparel prices have flatlined after increasing robustly in 2011 and 2012 and maintaining some momentum into mid-2013. Ditto for new cars. Both of those series I have expected to re-accelerate, and they have not. They, along with medical care commodities, are the biggest chunks of core goods in the CPI, which is why that series continues to droop. However, medical care commodities – which was driven lower in 2013 due to the effect of the sequester on Medicare payments – is starting to return to its prior level as that effect drops out (see chart, source BLS).
We will see in a few hours what happens to median inflation. My back of the envelope calculation on the median suggests median CPI might actually rise this month in reverse of last month.