Jaguar Inflation – A Layman’s Explanation of Government Intervention
I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one.
It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone’s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy.
For you junior mining enthusiasts, Otto at IKN relates his frustrations with trying to do the right thing and be a good egg among mostly rotten ones, then rubs it in the face of certain hate mailers. [biiwii comment: there is a reason he and I have gotten along well over the years, and that reason is that I perceive him to be a rarity in the gods-forsaken junior mining sphere… honest and in touch with regular people]
Below is a summary of my post-CPI tweets. You can follow me @inflation_guy :
1y inflation swaps and gasoline futures imply a 1-year core inflation rate of 0.83%. Wonder how much of that we will get today.
Very weak CPI on first blush: headline -0.3%, near expectations, but core 0.07%, pushing y/y core down to 1.71% from 1.81%.
Ignore the “BIGGEST DROP SINCE DECEMBER 2008″ headlines. That’s only headline CPI, which doesn’t matter. Core still +1.7% and median ~2.3%
Amazing how core simply refuses to converge with median. Whopping fall in used cars and trucks and apparel – which is dollar related.
Core services +2.5%, unch; core goods -0.5%, lowest since 2008. But this time, we’re in a recovery.
Medical Care Commodities, which had been what was dragging down core, back up to 3.1% y/y. So we’re taking turns keeping core below median.
Core ex-housing declines to +0.800%, a new low.
That’s a new post-2004 low on core ex-shelter.
Accel major groups: Food, Med Care (22.5%) Decel: Housing, Apparel, Transp, Recreation, Educ/Comm, Other (77.5%). BUT…
But in housing, Primary Rents 3.482% from 3.343%, big jump. Owners’ Equiv to 2.707% from 2.723%, but will follow primaries.
Less-persistent stuff in housing responsible for decline: Lodging away from home, Household insurance, household energy, furnishings.
Real story today is probably Apparel, which is clearly a dollar story. Y/y goes to -0.4% from +0.6%. Small weight, but outlier.
Similarly used cars and trucks, -3.1% from -1.7% y/y (new vehicles was unch at 0.6% y/y).
On the other hand, every part of Medical Care increased. That drag on core is over.
Curious is that airfares dropped: -3.9% from -2.8%. SHOULD happen due to energy price declines, but in my own shopping I haven’t seen it.
I don’t see persistence in the drags on core CPI. There’s a rotation in tail-event drags, which is why median is still well above 2%.
We continue to focus on median as a better and more stable measure of inflation.
Back of the envelope calc for median CPI is +0.23% m/m, increasing y/y to 2.34%. Let’s see how close I get. Number around noon. [Ed. note: figure actually came in around 0.15%, 2.25% y/y. Not sure where I am going wrong methodologically but the general point remains: Median continues to run hotter than core, and around 2.3%.]
A good report that departs from some of the nuts and bolts (so much so that I forgot to include the usual currency segment, which we have frankly had nailed since the commodity currencies broke down a year ago and the great USD rally was just a twinkle in Uncle Buck’s eye ), managing what was an expected early December drop in markets with an eye out toward Tax Loss, Santa and January Effect seasonals.
But to me the most important aspects of #321 are its clear views about why nothing about this macro environment is healthy, how the market is vulnerable and how 6 years later we are simply closing out a massively significant market event, with the majority at the opposite end of the emotional spectrum to Q4, 2008.
On that note, at the prodding of a subscriber, I’ve excerpted a segment from NFTRH 7 (Nov. 8, 2008) on Deflation and Inflation. To me it shows how little things have changed in the ensuing 6 years. Amazing, really. I’ll probably post it here later, to go with Friday’s post about a potential ‘inflation trade’ bounce, possibly in early 2015.
Well, now that the title has hopefully gotten your attention I’d like to talk about the ‘d’ and ‘i’ words that so many financial types – myself included – throw around so often. This is due to a reader/subscriber KR’s aggravation at my use of the word deflation, which he had thought was meant sarcastically, but then came to find out I am serious when I use it.
First I want to note that I seem to have been pissing everyone off lately, gold bugs (one of which I am) and gold bears in particular. That is due to my writing style being one where if I’ve got something to say, I say it. Sometimes that’s bad for business, as I can get a little heavy handed.
I’ll try to be less heavy handed going forward but in criticizing what I view as promotion with little backing substance (whether bullish or bearish), I don’t retract any comments aimed at the type of people that I think are not being square with readers or are simply not doing the work required (i.e. promoting lazy analytical thinking).
Japan is trying to kill the Yen, China is dropping interest rates and the world over we have a rolling inflationary operation that is little more than a game of Whack-a-Mole. BoJ popped up a couple weeks ago and now this one…
ex motor fuel, Transportation went from 0.6% y/y to 0.7% y/y.
Housing: primary rents 3.34% from 3.29%. OER 2.72% from 2.71%. Lodging away from home was big mover at 8.4% from 5.0% (but small weight).
Within medical care, medicinal drugs decelerated from 3.08% to 2.77%; but hospital & related svcs rose to 3.91% from 3.47%.
Core CPI ex-housing still rose, from 0.88% (a ten-year low) to 0.95%.
Primary rents to us look like they should still be accelerating, and are behind pace a bit.
Really, nothing soothing at all about this CPI print, unless you were hoping to get inflation “back to target.”
Pretty feeble response in inflation markets to upside CPI surprise, but that’s likely because of the looming auction.
After several months of below-trend and below-expectations prints in core inflation, core inflation got back on track today. I must admit that I was beginning to get a big concerned given the multiple months of downside surprise (especially in September, when August’s core inflation figure printed 0.0%), but the solidity of Median CPI has always suggested that we should be getting close to 0.2% prints every month and so a catch-up was due.
It is also possible that median inflation could converge downward to core inflation, but quantitatively we would only expect that if the reasons for core inflation’s decline were that categories which tend to lead were heading lower. In this case, that wasn’t what was happening: most of what was happening to core inflation was self-inflicted, caused by sequester effects that pushed down medical care. So it was always more likely that core inflation would begin to converge higher than the other way around.
Some Fed speakers have recently been voicing concern about the possibility of an unwelcome decline in inflation from these levels. I am flummoxed about those remarks – surely, Federal Reserve economists are aware of median inflation and understand that there is absolutely no evidence that prices broadly are increasing more slowly than they were last year. No evidence whatsoever. But perhaps I should not malign Fed economists when the speakers may have other agendas – for example, the desire to keep interest rates as low as possible lest asset markets correct and cause a messy situation, and therefore to find reasons to ignore any signs that inflation is already at or near their target with upwards momentum.
Our forecast for median inflation has been slowly declining since the beginning of the year, when we expected something from 2.8%-3.4%. As of September, our forecast was 2.5%-2.8%. Median CPI today rose 0.21%, pushing the y/y figure to 2.29%. That’s the highest level since the crisis, just beating out the high from earlier this year and probably signaling a further increase. Our September forecast will not be far wrong.