Post-CPI

By Michael Ashton

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.

  • The timing of Yellen’s testimony was useful for her. Given base effects, y/y CPI may drop to 2.1% from 2.2% today. So y’day she >>>
  • >>>could sound hawkish, having a sense that today she’d get a decent CPI. It’s base effects that could drop CPI – but that’s optics.
  • Last Jan, core CPI printed 0.293%. Anything less than 0.23% will cause y/y to tick downward. Feb is also a tough hurdle.
  • But these MAY be tough hurdles because of tricky seasonals. Certainly Jan’s number could be. But this is why we look at y/y.
  • Actually, the BLS revised some of that…core was 0.293% in Jan originally but now comparison is a trifle easier at 0.266%.
  • So revising my prior tweet: anything less than 0.20% will cause y/y to tick downward. Feb’s hurdle will be 0.25%.
  • Well howdy doo. Core CPI +0.31% m/m, far above consensus and pushing y/y to 2.3% (actually 2.26%) when it was expected to fall to 2.1%.
  • That’s a whoops.
  • That’s the highest m/m core in a decade. At least, after revisions have lowered some peaks.

bfmcedd

  • Housing y/y 3.12% from 3.04%, Apparel +1.0% from -0.04%. Medical Care 3.86% vs 4.07%.
  • Last 12 m/m figures from CPI. At least the last 5 look like a kinda scary trend. Probably illusory.

last12

  • Core services 3.1% y/y, unchanged. But core goods -0.2% vs -0.6% last mo.
  • That’s curious given dollar strength but a good reminder that the dollar isn’t inflation destiny.
  • So within Housing, Primary Rents slackened to 3.93% vs 3.96% y/y. OER also ebbed, 3.54% vs 3.57%.
  • So rise in housing was less important parts: household energy (3.51% vs 2.45%) and various furnishings. Again, those are core goods.
  • New and used motor vehicles, which is 6.6% of CPI, bumped up to -0.86% vs -1.03% y/y.
  • In Medical Care: drugs 4.85% vs 4.81%, Prof Svcs 2.94% vs 3.11%, Hospital 4.05% vs 4.28%. Again, goods not services.
  • Not sure how to feel about the goods bumps. On the 1 hand that’s what has held core down so possibly signif. But also less stable.
  • Core inflation EX housing, 1.35% y/y, up from 1.21% but still pretty low and down from the level of a year ago.
  • Core CPI back near highs, but not there yet.

bfm4f15

  • Hey, on the plus side this ought to help tomorrow’s 30y TIPS auction.
  • So here are the four pieces, in reverse order of stability. 1. Food & Energy. Not a surprising story but headline, not core.

fande

  • Core goods. This is the current surprise. Might be seasonal adj issue. But if this goes to 1%, it’s a big story.

coregoods

  • Core services less rent of shelter. Things like medical care. Have been softer, mild uptick this month. Core over 3% needs this.

coresvcsnoros

  • Rent of Shelter. No sign of any letup here, so no disinflation in sight.

ros

  • I guess the story of CPI today is that it’s a new story. It wasn’t housing, wasn’t medical care. It was the little stuff. Core goods.
  • That MIGHT mean that it’s a one-off, seasonal thing. But also could mean that inflation is broadening.
  • Here is a chart of the weight of CPI categories that are rising faster than 3%.

3pctweight

  • …and the weight of categories deflating. So recent rise is more about the deflationary tails ebbing.

less0weight

  • Early estimate of Median CPI: 0.26%, y/y to 2.60%. But median category is an OER subcategory so my estimate may be off.
  • A good time to remember not to put too much weight on one month’s number.
  • BUT, after Feb, 7 of the next 9 months will compare to prior year’s figures under 0.2%.
  • If we avg 0.2142% for rest of year on core CPI (that’s the avg of last 4 months we’ve seen), 2017 will come in at 2.70% core.
  • Thinking about inflation more? Think about reading my book:

cover

  • OK that’s all for now on CPI. One more note: I can’t think of a single way this is positive for equities. Or fixed-rate bonds.
  • If you’re a pension fund, that means you should read our recent article with some urgency:
  • Bottom line today is that CPI *may* be one-offs…but it’s hard to argue bearish on inflation with the highest m/m core in a decade.

I don’t have a lot to add to this, other than to point out that if Yellen was trying to sound hawkish yesterday, thinking she could back off today after a soft CPI, then she set a trap for herself. After a solid CPI, she will either have to double down on the hawkish rhetoric or somehow soften her remarks at an awkward time for that. I do not believe for a minute that Yellen, the most dovish Chairman in history, is eager to raise rates in March. But I also believe that she has set herself up to lose a lot of credibility now if the Fed fails to act. The one possible saving grace is that the FOMC meeting in March is on the same day as the next CPI figure, so depending on the month-to-month wiggle she might save some face.

But it is also possible, and I think increasingly probable, that the next CPI is also firm. I don’t think we will get another 0.3%, but an 0.25% would also be disturbing. With core goods the main contributor this month, and core services taking the month off, a resumption of the strengthening from core services is not out of the question.

Don’t read too much into this one number. But looking at the contour of the recent inflation data, you can be forgiven for taking precautions.

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