Below is a summary of my post-CPI tweets.
- Friday the 13th and a heavy data day. What could go wrong?
- 10y breakevens at local highs of 1.90% – but that’s the biggest spread over core CPI in several years.
- …yet we still have 10y TIPS 50bps to fair at this level of interest rates.
- Economist expectations are for 0.21% on core and 1.78% y/y. Interesting given how low it has been recently.
- I don’t usually look at headline but the y/y number is forecast to jump to 2.3% from 1.9%. That will get some attention.
- I think the market forecasts are about right for core, but there’s a wide range of upside risks. Autos are due to catch up, e.g.
- But that’s why the forecasts make sense. 0.15% for trend plus 0.05% for expected value of risks.
- …in turn, that means the point forecasts are not the most likely prints. They’re in between the most likely prints.
- Core +0.13%, 1.69% y/y.
- Breakdown will be interesting. Housing broad category went to 2.79% y/y from 2.91%. Medical Care fell to 1.56% from 1.81%.
- Used cars/trucks went to -3.7% vs -3.8% y/y, so that rebound is still ahead of us. Surveys of car prices are up a lot, just not in BLS yet.
- pulling in the breakdown now…core services 2.6% from 2.5%, but core goods deflation deepens to -1.0% from -0.9%.
- Core goods deflation, however, ought soon to be rising again after the lagged effect of the dollar’s decline passes in.
- In Housing, Primary Rents plunged to 3.78% from 3.88%. That’s huge. OER dropped to 3.18% from 3.27%. Also huge. There’s your story.
- Core ex-housing rose to 0.58% vs 0.52% y/y, so there’s more going on here but the housing. Wow.
- A few months ago we had y/y OER fall by more, but that was when OER was overextended.
- Here is primary rents y/y. I guess this isn’t DRAMATIC – just quite contrary to my own expectations for a continuation of the rebound.
- In Medical Care, Medicinal Drugs fell to 1.01% from 2.51%. Wow! But Professional Services and Hospital Services accelerated slightly.
- Here’s CPI for pharma. Think we’ve discussed this before – likely compositional in nature, more generics thanks to worse insurance.
- Professional services (doctors) bounced;not significant. Also somewhat compositional as old doctors quit rather than take ins. headaches.
- College Tuition 2.08% vs 1.89%. Have I mentioned the new S&P Target Tuition Inflation Index recently? 🙂
- Just b/c …who can get enough of wireless telecom services? Bounced, mostly base effect of course. Bottom line was that dip was a 1-off.
- New cars also still deflating, BTW. -1.0% vs -0.68%. Obviously this will change with Houston buying loads of new cars.
- Speaking of Houston: core CPI in Houston y/y ended June: 1.31%. For y/y ended Aug: 1.90%. But that’s actually before Harvey.
- In Miami, 2.01% vs. 2.26% (June vs August). Have to wait a bit to get October numbers – they’ll come out in Dec.
- Bottom line on the storms is that we haven’t seen the impact yet on CPI. Still to come.
- My early estimate of Median CPI is 0.20%, bringing y/y up to 2.17% from 2.15%.
- Housing and Medical Care still keeping pressure on core.
- Interestingly, these other categories, including Food, and Energy too, all saw acceleration this month (except for other).
- distribution of changes getting more spread out…
- Percentage of basket over 3% hasn’t changed much, ergo median didn’t change much.
- Does this change the Fed’s calculus? I don’t think so, especially with wages accelerating. Still waiting for one-offs to unwind.
- The doves will argue that the unwind of a one-off is itself a one-off and we should therefore look thru and see 0.12-0.14 as the trend.
- They’re unlikely to carry the day in Dec, even if the data don’t bounce higher. But if core stays weak the mkt will unwind the 3 in 2018.
- 10y breakevens -3bps since the number. Market had seemed a little long but this is still too low for breakevens.
- Four pieces. Piece 1: Food & Energy
- Piece 2: core goods. Won’t go down forever with the dollar well off its highs.
- Core services less ROS. A bounce. Sustainable? We’ll have to see.
- Piece 4, Rent of Shelter. Seemingly ignoring continued rise in home prices. Back to model but weaker than I expected.
- Last chart. here is the argument: do we cheer the weak consumer inflation or worry about higher wages?
- Yes, wages follow inflation rather than lead…but the Fed doesn’t believe that.
Thanks to everyone who followed my new “premium” (but cheap) channel. I wrote on Wednesday about the reason for changing my Tweet storm; in a nutshell, it’s because research is starting to be priced a la carte at the major dealers and hopefully this means that quality but off-Street analysis might finally be competing on an even footing rather than competing with “free.” If you think there’s value in what I do, I’d appreciate a follow. If not…well, if the market tells me that what I’m producing isn’t worth anything, then I’ll stop producing it of course!
But in the meantime, here is the story of CPI this month. A continuing regression of rents and OER to model levels held core down to recent-trend levels. But there are many one-off and temporary effects that are due to be reversed, and relationships that suggest certain components are due to catch up to underlying realities. For example, here is the picture of Used Cars and Trucks CPI, compared to the Manheim Used Vehicle Value Index 4 months prior.
According to the relationship between these series over the last decade, CPI for Used Cars and Trucks should be growing about 5% faster than it is presently, and rise another 3-4% in the next few months. New and Used Motor Vehicles inflation is about 8% of core CPI, so this effect alone could add 0.7% to core CPI! Or, put another way, right now core CPI is about 0.4% lower than it would be if the CPI was measuring the actual price of vehicles the same way that Manheim does it. That’s a big number when the entire core CPI is only 1.7%.
The continued, and actually extended weakness in core goods is also due to reverse. I don’t mean that core goods inflation will go from -1% to +3% but only to 0.5%. But that 150bp acceleration, in one-quarter of the core CPI, would also raise core CPI by 40bps or so. To be sure, there is some double-counting since a third of core commodities is new and used vehicles, but that merely reinforces the message.
So, too, are the effects in medical. Volatility in those series should persist, which means that since they are at a low ebb there’s a better bet that the next volatile swing is to higher prices.
All of which is to say that the hawks on the Federal Reserve Board actually have it right, in a sense. Prices are headed higher, and inflation is accelerating. It would be a truly shocking development if core inflation one year from now was unchanged from the current level. Indeed, I think there is a better chance that core inflation is above 2.7% than below 1.7%. On another level, the hawks aren’t quite right though. By hiking rates before draining excess reserves, the Fed risks kicking off the vicious cycle I have mentioned before: higher rates cause higher money velocity, which causes higher inflation, which causes higher rates etc. Without control of reserves at the margin, the Fed cannot control money supply growth and so the normal offset to rising monetary velocity in a tightening cycle, slowing money growth, comes down to chance. Either way, the Fed is very likely to tighten in December, but beyond that it probably matters more who ends up in the Chairman’s seat than anything economic data.
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