Post-CPI

By Michael Ashton

Below is a summary of my post-CPI tweets.

  • Consensus is for a soft 0.2% m/m on core CPI, keeping the y/y figure at 1.7%. I think the consensus works out to about 0.16%.
  • We are dropping off, from y/y numbers, last October’s 0.147% print. The last two months we’ve seen are 0.25% in Sept, and 0.13% in Oct.
  • The upshot is that to get the y/y to round up to 1.8%, we need 0.201%
  • We will be paying attention to cars and trucks. Today the Daily Shot caught on to something I pointed out a while ago:

  • That chart is actually out of date; the Mannheim used car index has risen further. Floods lead to car price increases. Only Q is when.
  • I don’t spend a lot of time on headline CPI forecasts – they obv matter more to TIPS holders in the near-term but they’re all gasoline vol.
  • Still, the consensus of 0.1% m/m looks low to me given the rise in gasoline prices. To me, gasoline should be additive this month.
  • Does seem like everyone talking about upside risk, which scares me a bit. Guess we’ll know in 6 minutes.
  • 10y breakevens -1bp on the day. Investors concerned they’re out over their skis at 1.89% breakevens!!
  • 1%/0.2%. But it’s a hefty 0.2%, 0.225% to three decimals.
  • y/y to 1.774%, rounding up to 1.8%.
  • Last 12 months. Is high the aberration or low?

  • 10y breaks back positive.
  • New and Used cars and trucks are NOT the culprit so we will have to see.
  • Medical Care broad category 1.68% from 1.56%, so the breakdown there will be interesting.
  • Core goods stayed at -1.0%; core services rose to 2.7%. Three months ago core services y/y was 2.4%; a year ago it was 3.2%.
  • y/y core cpi. BUY THE DIP!! Well, something like that. Those dips were one-offs, and those one-offs are fading (I think…calculating now)

  • OK, breakdown…housing was unch at 2.786% y/y. But primary rents dropped again, to 3.695%. OER rose slightly, to 3.196% from 3.182%.
  • Those two effects don’t quite offset, actually a net drag.
  • So new vehicles (3.68% of CPI) was -1.38% vs -1.00%; used cars (1.99% of CPI) was -2.89% vs -3.79%. So used cars contributed a tiny bit.
  • But still….wayyyyy lower than it should be. Unless the Manheim index is just plain wrong, and BLS is right, this is all in future.
  • In Medical Care, always fun: Drugs dropped further to 0.88% from 1.01%. So crazy. But Prof Services, and Hospitals, both rose:
  • Prof services 0.38% vs 0.23%, hospital services 4.54% vs 4.27%. Not big increases, but changing the direction.
  • Health insurance still basically zero: 0.15% vs 0.06% y/y. This should change if my latest renewal is any indication.
  • Professional Services y/y. A bounce, but don’t get too excited!

  • @pearkes: doesn’t CPI HI measure profit margins, not gross premiums?
  • Replying to @pearkes: Well, sort of, tho not exactly. But if all of the pieces of medical care are low, and insurance rises sharply, gotta show up somewhere.

[Editor’s note: I don’t usually put comments and responses in this summary but that was an important question]

  • College tuition & Fees: 2.17% vs 2.08%. Tuition increases have been moderating because endowments are flush thanks to the bull market.
  • Core inflation ex-housing: 0.71% vs 0.58%. The sudden drooping in primary rents is really the main story now.
  • Oddly, CPI for shelter in Houston has decelerated from 2.6% to 1.5% the last two months. That’s at odds with what happened after Ike.
  • But this may be another delayed effect.
  • 10y breakevens spiked 1-2bps on the print, but are fading. Word on Street is “used cars, shelter, airfares…this was all expected.”
  • Apparently not so expected that they could have forecast it. And primary rents were down, not up.
  • and used cars were not up more than the seasonal expectation so the y/y didn’t change. So really, no.
  • Early guess at median is 0.24%-0.26%…median category looks like one of the OER subindices and the BLS doesn’t release the seasonal adj.
  • This is our model for OER. So I think Primary Rents’ decline is the outlier.

  • And here are primary rents.

  • I think the real story here is that medical was not the drag it has been recently. But the one-offs still haven’t really reversed hard yet.

  • Speaking of one-offs…the most famous one is wireless telecom. This will all smooth out over 12 months.

  • OK, inflation in four pieces: First Food & Energy.

  • Next less-volatile piece: Core goods. Deflation here surprisingly persistent, given dollar’s retreat.

  • Core services less rent of shelter bounces for 2nd month in a row. This is where medical care shows up.

  • And rent of shelter we have already discussed. It’s where it should be and probably accelerates marginally from here.

  • Last one: weight of categories above 3% still hanging out just below 50%. Still some very long left tails separating core from median.

  • Thanks for tuning in.
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This data is going to get increasingly important as the one-offs fade and the next upswing in inflation happens. And we don’t need anything really weird to happen in order to get that upswing. The cell phone aberration will gradually exit the data, and make year-on-year comparisons of cell phone service very easy (actually, we might have inflation in cell phone services, simply because after unlimited data it’s hard to have any more big quality improvements!). Autos will eventually respond to the heightened demand post-flood. Medical Care is unlikely to be flat forever, once all of the compositional shifts have happened (and, if Obamacare is gutted, as the Republicans keep trying to do, then the compositional shifts back could make medical care inflation seem illusorily high, just as now it is illusorily low).

The next few months see difficult year-ago comparisons for CPI: 0.18%, 0.22%, 0.31%, 0.21% are the m/m figures for November and December 2016 and January and February 2017. That averages 0.23%, compared to 0.20% for the last three months we have seen. Ergo, rises in the y/y figures will happen slowly if at all, until March’s data in April. March/April/May/June/July averaged 0.05%, so in that time frame the y/y will be rising 0.1%-0.2% every month. And that’s when alarm will set in in the bond market, even though this is totally foreseeable.

Inflation is rising globally. The only place this isn’t really clear is in Europe, where it’s rising but from such a low level that the wiggles change the visceral appearance of the chart every month. This will keep the US central bank tightening, and other central banks will gradually exit QE. This is very bad for asset markets, and as rates rise and money velocity perks back up, the vicious cycle may well be ignited. 2018 is going to be very, very interesting.

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