Tag Archives: inflation

Gold is Not a Play on “CPI Inflation”

By Steve Saville

I have never been in the camp that exclaims “buy gold because the US is headed for hyperinflation!”. Instead, at every step along the way since the inauguration of the TSI web site in 2000 my view has been that the probability of the US experiencing hyperinflation within the next 2 years — on matters such as this there is no point trying to look ahead more than 2 years — is close to zero. That is still my view. In other words, I think that the US has a roughly 0% probability of experiencing hyperinflation within the next 2 years. Furthermore, at no time over the past 15 years have I suggested being ‘long’ gold due to the prospect of a rapid rise in the CPI. This is partly because at no time during this period, including the present, has a rapid rise in the CPI seemed like a high-probability intermediate-term outcome, but it is mainly because gold has never been and is never likely to be a play on “CPI inflation”.

Gold is a play on the economic weakness caused by bad policy and on declining confidence in the banking establishment (led by the Fed in the US)← [edit: as NFTRH steadfastly continues to remind subscribers. We obviously agree 100% with Saville’s view]. That’s why cyclical gold bull markets are invariably born of banking/financial crisis and/or recession, and why a cyclical gold bull market is more likely to begin amidst rising deflation fear than rising inflation fear.

There are times when the declining economic/monetary confidence that boosts the investment demand for gold is linked to expectations of a rapid increase in “price inflation”, but it certainly doesn’t have to be. For example, the entire run-up in the gold price from its 2001 bottom to its 2011 peak had nothing to do with the CPI. Also, an increase in the rate of “CPI inflation” would only ever be bullish for gold to the extent that it brought about declining confidence in the economy or the banking establishment, as indicated by credit spreads, real interest rates, the BKX/SPX ratio and the yield curve. Since it’s possible for the CPI to accelerate upward without a significant decline in confidence, it’s possible that an upward acceleration in the CPI would not be bullish for gold.

The bottom line is that as far as the gold market is concerned, the CPI is more of a distraction than a driver.

[edit:  Once more we ask readers to tune out promoters going on about China demand, Indian Wedding Season, US wages and consumer price inflation, Greece this and Ukraine that.  Saville just very clearly explained why they have been wrong for the entire bear market]

Post-CPI Summary

By Michael Ashton

Summary of My Post-CPI Tweets

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%.

abovezero

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.

distrib

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.

Official CPI vs. Shadowstats CPI

By Steve Saville

The official CPI versus the Shadowstats.com CPI

Even the most well-meaning and rigorous attempt to come up with a single number (a price index) that reflects the change in the purchasing power (PP) of money is bound to fail. The main reason is that disparate items cannot be added together and/or averaged to arrive at a sensible result. For example, in one transaction a dollar might buy one potato, in another transaction it might buy 1/30,000 of a new car and in a third transaction it might buy 1/200 of a medical checkup. What’s the average of one potato, one-thirty-thousandth of a new car and one-two-hundredth of a medical checkup? The creators of price indices claim to know the answer, but obviously there is no sensible answer. However, in this post I’m going to ignore the conceptual problem with price indices and briefly explore the question: Which is probably closer to reality — the official CPI or the CPI calculated by Shadowstats.com?

Continue reading Official CPI vs. Shadowstats CPI

Post-CPI

By Michael Ashton

Summary of my Post-CPI Tweets

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 +0.157%, so it just barely rounded to +0.2%. Still an upside surprise. Y/Y rose to 1.69%, rounding to 1.7%.
  • y/y headline now +0.0%. It will probably still dip back negative until the gasoline crash is done, but this messes up the “deflation meme”
  • (Although the deflation meme was always a crock since core is 1.7% and rising, and median is higher).
  • Core ex-housing +0.78%. Still weak.
  • Core services +2.5%. Core goods -0.5%, which is actually a mild acceleration. So the rise in core actually came from the goods side.
  • Accelerating major cats: Apparel, Transp. Decel: Food/Bev, Housing, Med care, Recreation, Other. Unch: Educ/Comm. But lots of asterisks.
  • Shelter component of housing rose back to 3% (2.98%) y/y; was just fuels & utilities dragging down housing.
  • Primary rents: +3.54% y/y, a new high. Owners’ Equiv Rent: 2.69%, just off the highs.
  • In Medical Care, Medicinal Drugs 4.13% from 4.16%, but pro services +1.47 from +1.71 and hospital services 3.28% from 4.08%.
  • In Education and Communication: Education decelerated to 3.5% from 3.7%; Communication accel to -2.2% from -2.3%.
  • 10y breakevens +3bps. Funny how mild surprises (Fed, CPI) just run roughshod over the shorts who are convinced deflation is destiny.
  • No big $ reaction. FX guys can’t decide if CPI bullish (Fed maybe changes mind and goes hawkish!) or bearish (inflation hurts curncy).
  • Here’s my take: Fed isn’t going to be hawkish. Maybe ever. So this should be a negative for the USD.

Continue reading Post-CPI

CPI Ticks Up

By Biiwii

Up by .2% the BLS reports this morning…

Consumer Price Index Summary

Here is the graphical view of recent CPI history…

cpi

The US dollar has been correcting and over at NFTRH.com we showed some support parameters for Uncle Buck.

Also, as noted in the precious metals update for subscribers this morning, silver is making a move vs. gold and this will be a key indicator on whether or not a good old fashioned ‘inflation trade’ can get going.  It has not triggered a signal yet, but it is flirting.

The thing is, there has been a nice deflationary pull coming out of Europe and Asia that has played into the US Goldilocks scenario (strong US currency, strong stock markets and tamped down prices within the economy).  Europe is inflating its asset markets (i.e. trying like hell to boost prices)… Europe Fights Lower Prices.

[edit] Also see Euro Area PMI’s Continue Upward just posted at NFTRH.com.

Now, prices may be becoming an issue within the US economy as the global situation eases (literally).

Around the Web

By Biiwii

 

Europe Fights Lower Prices

By Biiwii

The European inflation rate is “calculated using the weighted average of the Harmonised Index of Consumer Price [HICP] aggregates” according to TradingEconomics.com.  That is a fancy way of saying the things people pay for, including the things they need on a daily basis.

Here is the dreaded deflation (of consumer prices) that Europe is fighting.  Like the US before it, Europe is operating on a plan that would boost prices (i.e. the effects of inflation) higher so that people participating in the financialized economy can benefit from rising equities (as we first projected in Q4 2014) and the regular people can, well… get screwed (USA style).

euro.inflation

Welcome to the European ‘me too’ QE play!

Yesterday the Euro boinked our target of 105 [1.04935] and all seems to be going according to plan.

euro

But the play (dollar bull, euro bear) is getting extreme now.  Extremes can persist but they are what they are, defined as “reaching a high or the highest degree; very great”.

Let’s just assume the extremes have not yet reached the highest degree.  That does not mean the risk vs. reward to a stance in line with current trends is not extreme.  It is.  Time is the thing.  Trend followers who momo mature trends and go on autopilot always get burned sooner or later.

Post-CPI Thoughts

By Michael Ashton

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.

  • CPI -0.7%, core +0.2%. Ignore headline. Annual revisions as well.
  • Core +0.18% to two decimals. Strong report compared to expectations.
  • Core rise also off upwardly-revised prior mo. Changing seasonal adj doesn’t affect y/y but makes the near-term contour less negative.
  • y/y core 1.64%, barely staying at 1.6% on a rounded basis.
  • Core for last 4 months now 0.18, 0.08, 0.10, 0.18. The core flirting with zero never made a lot of sense.
  • Primary rents 3.40% from 3.38% y/y, Owners’ Equiv to 2.64% from 2.61%. Small moves, right direction.
  • Overall Housing CPI fell to 2.27% from 2.52%, as a result of huge drop in Household Energy from 2.53% to -0.06%. Focus on the core part!
  • RT @boes_: As always you have to be following @inflation_guy on CPI day >>Thanks!
  • A bit surprising is that Apparel y/y rose to -1.41% from -1.99%. I thought dollar strength would keep crushing Apparel.
  • Also New & Used Motor Vehicles -0.78% from -0.89%. Also expected weakness there from US$ strength. Interesting.
  • Airline fares, recently a big source of weakness, now -2.98% y/y from -4.71% y/y.
  • 10y BEI up 4bps at the moment. And big extension tomorrow. Ouch, would hate to have bet wrong this morning.
  • Medical Care 2.64% y/y from 2.96%.
  • College tuition and fees 3.64% from 3.43%. Child care and nursery school 3.05% from 2.24%. They get you both ends.
  • Core CPI ex-[shelter] rose to 0.72% from 0.69%. Still near an 11-year low.
  • Overall, core services +2.5% (was +2.4%), core goods -0.8% (was -0.8%). The downward pressure on core is all from goods side.
  • …and goods inflation tends to be mean-reverting. It hasn’t reverted yet, and with a strong dollar it will take longer, but it will.
  • That’s why you can make book on core inflation rising.
  • At 2.64% y/y, OER is still tracking well below our model. It will continue to be a source of upward pressure this year.
  • Thank you for all the follows and re-tweets!
  • Summary: CPI & the assoc. revisions eases the appearance that core was getting wobbly. Median has been strong. Core will get there.
  • Our “inflation angst” index rose above 1.5% for the 1st time since 2011. The index measures how much higher inflation FEELS than it IS.
  • That’s surprising, and it’s partly driven by increasing volatility in the inflation subcomponents. Volatility feels like inflation.
  • RT @czwalsh: @inflation_guy @boes_ using surveys? >>no. Surveys do a poor job on inflation. See why here: http://www.palgrave-journals.com/be/journal/v47/n1/abs/be201135a.html  …
  • 10y BEI now up 5.25bps. 1y infl swaps +28bps. Hated days like this when I made these markets. Not as bad from this side.
  • Incidentally, none of this changes the Fed outlook. Median was already at target, so the Fed’s focus on core is just a way to ignore it.
  • Once core rises enough, they will find some other reason to not worry about inflation. Fed isn’t moving rates far any time soon.
  • Median CPI +0.2%. Actually slightly less, keeping the y/y at 2.2%.

Continue reading Post-CPI Thoughts

Crazy Spot Curves – Orderly Forwards

Guest Post by Michael Ashton

This is an interesting chart I think. It shows the spot CPI swap curve (that is, expected 1y inflation, expected 2y compounded inflation, expected 3y compounded inflation), which is very, very steep at the moment because of the plunge in oil. It also shows the CPI swap curve one year forward (that is, expected inflation for 1y, starting in 1y; expected inflation for 2y, starting in 1y; expected inflation for 3y, starting in 1y – in other words, what the spot curve is expected to look like one year from today). The x-axis is the number of years from now.

efficient

Continue reading Crazy Spot Curves – Orderly Forwards

Around the Web

 

Money, Commodities, Balls and How Much Deflation is Enough?

Guest Post by Michael Ashton

Money: How Much Deflation is Enough?

Once again, we see that the cure for all of the world’s ills is quantitative easing. Since there is apparently no downside to QE, it is a shame that we didn’t figure this out earlier. The S&P could have been at 200,000, rather than just 2,000, if only governments and central banks had figured out a century ago that running large deficits, combined with having a central bank purchase large amounts of that debt in the open market, was the key to rallying assets without limit.

That paragraph is obviously tongue-in-cheek, but on a narrow time-scale it really looks like it is true. The Fed pursued quantitative easing with no yet-obvious downside, and stocks blasted off to heights rarely seen before; the Bank of Japan’s QE has added 94% to the Nikkei in the slightly more than two years since Abe was elected; and today’s announcement by the ECB of a full-scale QE program boosted share values by 1-2% from Europe to the United States.

Continue reading Money, Commodities, Balls and How Much Deflation is Enough?