Posts Tagged ‘cpi index’

Not Broken, Just Bent?

August 29, 2013 2 comments

Equity market bulls are a tenacious bunch. In August, with increasing tensions in the Middle East – Egypt and, this time, Syria – along with uncertainty over the future course of monetary policy and steadily rising interest rates, the S&P 500 has lost all of 2.8% after hitting a new all-time high early in the month. Investors who focus purely on the price charts and on the behavior of the indices should be delighted in how stocks have performed with this bad news and fairly weak earnings.

Of course, it should be noted that stocks have still not reached the 2007 highs, much less the 2000 highs, in real terms (see chart, source Bloomberg: this is just the S&P 500 divided by the CPI index). This isn’t to belittle the rally, which has roughly doubled the value of equity investments, in real terms, since the bottom. But it should remind us that this is not a secular bull market, yet, even though we have reached new nominal highs.


As we step away from the pure equity focus, though, the picture grows progressively uglier. After a period of stability in late June through early August, interest rates have begun to rise again. The 10-year note is at 2.76% (but last week approached 2.90%). The 10-year TIPS is at 0.65% after challenging 0.80%. The further selloff makes the consolidation in July look like just a pause in the middle of an otherwise-steady uptrend in yields. We were at 1.60% as recently as May! This selloff has been unusual, but then we all know that it’s because yields shouldn’t have been that low in the first place. Some of this selloff is merely returning from a ridiculously expensive position. (With all that being said, I must admit that after this kind of selloff, I would want to be taking a shot from the long side as we move into September).

Commodities are higher, with the DJ-UBS index comfortably above the 100-day moving average for the first time this year (see chart, source Bloomberg). And this isn’t merely a reflection of energy prices moving higher, because spot crude oil at $108.80 is actually back within the range it has held since early July: $104-$109. Over the last month, grains are 4% higher, livestock 2.5% higher, precious metals 10% higher, industrial metals 5% higher. So this movement in commodities has been fairly broad-based (the softs are down), even with the dollar treading water over that period.


So, while stocks are merely bent, not broken, at this stage, I’d prefer to own bonds – even nominal bonds – to them at these levels, and of course I still like commodities. I do think there is a halfway decent chance that the stock market could transition from bent to broken in the next month.

Both commodities and inflation-linked bonds did poorly today, though, at least partly because an article in the Wall Street Journal today (by Jon Hilsenrath) suggested that Yellen is “playing down her chances of getting the job,” and that therefore Summers is the front-runner.

It is probably safe to say that Summers is less-dovish than is Yellen, although we don’t know much about his monetary policy views since he seems to have few of them. We do know that he sees “few harmful side effects” from QE, which should be automatically disqualifying (almost as automatically disqualifying as being a super-intelligent academic economist should be). With either of these candidates – and it seems as if these really are the only two, since no one else has been mooted in the press – we are going to get a very dovish central banker by almost any historical standard. Central bankers have known for decades about the perils of quantitative easing…that’s why they didn’t do it in the recession of the early 1980s, or the recession of the early 1990s, or the recession of the early 2000s. Each of those recessions was plenty deep enough to warrant quantitative easing if there are few harmful side effects. But we know there are harmful side effects. So if Summers thinks there aren’t any, this just means that he is very current with the “new” wave of monetary thinking and too dismissive of the old, time-tested views (which is, after all, one of the weaknesses you can expect from a ‘brilliant academic’ who has already proven himself unable to manage one institution filled with other brilliant academics).

Now, I find it personally distressing that the market is so concerned with who the Fed Chairman will be. It shouldn’t matter that much, and here is something to reflect on: it wouldn’t matter so much if monetary policy were as straightforward and as much of a science as central bankers are trying to convince us that it is. The fact that the market thinks it matters (as do I) is all the evidence you need that it does matter, and that central banking is more art than science. And you can guess what I think about most modern art too, by the way.

In the context of the fact that the Fed itself appears to be pretty much broken, not bent, I guess I take solace in another thought: given the quantity of “excess reserves” in the system, the Fed can’t do much, positive or negative, for a while. The die has been cast, and it won’t really matter who takes the Chairman’s crown from Bernanke unless that person has a brilliant way to hit the delete key and make those reserves vanish. Otherwise, those reserves are going to press on the transactional money supply, and continue to push inflation higher over the medium term.


Inflation: As ‘Contained’ As An Arrow From A Bow

February 17, 2012 5 comments

Is 15 months in a row of rising core inflation ‘contained?’

Year-on-year core CPI has now risen for 15 consecutive months. At some point, it will seem reasonable to let it have a month off, but until now it hasn’t needed it. Fifteen months in a row. That’s impressive. It’s so impressive, in fact, that it hasn’t happened since 1973-1974, when prices were catching up from the failed experiment of price controls imposed by President Nixon in 1971-73. Core inflation has never, in the history of the data (which exists since 1957), accelerated for 16 consecutive months. So, next month we have a chance for a record!

Headline inflation was softer-than-expected by 0.1%, even as the NSA CPI index itself came in higher-than-expected. As I pointed out yesterday,  that was a semi-predictable consequence of the change to new seasonal adjustment factors. Core inflation was 0.218% month-on-month, however, which actually generated a rise in the rounded year-on-year index to 2.3% (2.277% to three decimal places). The table below shows the evolution of the year-on-year changes for the eight major subgroups from 6 months ago to 3 months ago to last month, to now.

Weights y/y change prev y/y change 3m y/y chg 6m y/y chg
 All items






  Food and beverages
























  Medical care












  Education and communication






  Other goods and services






Compared to last month, Apparel, Medical Care, Recreation, and Education/Communication accelerated, groups which total 23% of the consumption basket. Transportation and Food & Beverages both decelerated, and they total 31.5% of the basket. Now, notice that Transportation and Food & Beverages are the two groups that are most affected by direct commodity costs – energy and food, respectively. So…don’t get too excited by the deceleration there, although new and used motor vehicles and other components of Transportation also decelerated and that doesn’t have much to do with energy prices. In Food & Beverages, “Food at home” is decelerating (about 57% of the Food & beverages category) while “Food away from home” and “Alcoholic beverages” (the balance of the category) are accelerating.

Yes, you can get eyestrain looking too closely at these figures, but doing so does help.

For example, one theme I think the Fed is counting on is that the “Housing” component of CPI is expected to decelerate due to the still-high inventory of unsold homes and the fact that foreclosure sales can now proceed. It has been a conundrum why rents have been rising while home prices stagnate (actually, not much of a conundrum: there is an underlying inflation dynamic that in the case of the housing-asset market is being overwhelmed by a decline in multiples. But this is a conundrum to the Fed, and to be fair I also expected Housing inflation to be lower than it has been recently). And in this month’s data, you can see that the year-on-year increase in Housing CPI flattened out. But, as the table below shows, the Shelter component wasn’t what flattened out. Housing only went sideways because the “Fuels and Utilities” component declined – again, a commodity effect.

Weights y/y change prev y/y change 3m y/y chg 6m y/y chg












   Fuels and utilities






   Household furnishings and operations






I still expect Housing inflation to level out and probably to decline, but so far those expectations have been dashed. It will be uncomfortable for the Fed if it remains this way; a significant part of their expectations for a visually-contained core inflation number is (mathematically) due to the expectation that housing inflation isn’t going to keep rising. As you can see in the chart below (Source: Enduring Investments, the rest of core inflation outside of Shelter is continuing to rise. Inflation is not ‘contained’, except maybe for housing. Maybe.

I am fairly confident, though, that if Housing inflation does not decelerate as expected, then the Fed will find some other reason to ignore the very clear acceleration in inflation. The economists at the FRB are for the most part true believers in the notion that the output gap constrains any possible acceleration in inflation, despite ample evidence that output gaps don’t matter (or, anyway, matter far less than monetary variables). For another view of this proposition, see the Chart below, taken from this article by economist John Cochrane.

Fed economists also feel strongly that “well-anchored inflation expectations” means that they can ignore 15-month trends in core inflation, despite the fact that by Chairman Bernanke’s own admission we aren’t really very good at measuring inflation expectations (to be kind).

They have time. The Fed has recently begun to treat 2% (on core PCE, not core CPI) as more of a floor than a target, so it will be some months, even if core inflation doesn’t pause for a month or two pretty soon, before the Committee starts getting at all warm under the collar about inflation. Even then, they are extremely unlikely to take steps to reduce liquidity while Unemployment remains high. The Fed is in a political bind, and the only easy path for them is to “see no evil” on inflation while hoping that Unemployment drops swiftly enough for them to act before prices really get out of hand. We will see.

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