Post-CPI Summary

By Michael Ashton

Below is a summary of my post-CPI tweets.

  • ok, 10 minutes to CPI. 10y Breakevens unch to +0.5bp. They’re at 6 month highs of 1.92%, but amazing they can’t get to 2%.
  • On CPI: Last month there was an upside surprise with a strong 0.2%, making it 2 of the last 3 months with upside surprises.
  • The comparisons to year ago are about to get more difficult though. Today we drop off a 0.18% from last November.
  • We drop off a 0.22%, 0.31%, 0.21% next three months after that.
  • This month we’re again watching New & Used Cars and Trucks, which have not yet shown any response to survey evidence of increases.
  • Also an eye on Primary Rents, which have been declining although the Shiller Home Price Index is reaching new local highs.
  • Last mo, median CPI scored its largest m/m incr since July ’08. So in short – we’re in an inflation upswing; just need to see how much.
  • Consensus for today’s number is 0.2% on core – almost exactly, keeping y/y at 1.8%.
  • Well, core is 0.1%…but waiting for Bloomberg to drop the actual figures. Looks like a big miss, not a little miss.
  • yeah, 0.12%, pushing y/y down to 1.71%. Last 4 months have seen two high misses and two low misses.

  • Core goods rose to -0.9% y/y from -1.0%, but core services down to 2.5% from 2.7%. SO IT ISN’T THE INTERNET, FOLKS.
  • 10y breaks plunging 4bps since pre-data, on the way to creating another buying opportunity.
  • Only way 1.89% 10y BEI make sense is if inflation is permanently broken. But median CPI is 2.3% y/y. So it’s not broken!
  • (We have TIPS about 53bps cheap at current nominal yields).
  • In major subgroups, Apparel decelerated, Recreation decelerated, Other decelerated. Medical unch. Everything else up. Interesting.
  • In Housing, Primary Rents decelerated slightly again 2.68% from 2.70%, but seem to be converging on our model.
  • OER 3.12% vs 3.20%…there’s your problem…and Lodging Away from Home plunged to 0.60% from 1.36% y/y. But the latter is a small weight.
  • New vehicles -1.08% vs -1.38%; used cars to -2.10% from -2.89%. Not really the bump we are due.

  • In Medical Care: drugs 1.87% vs 0.88%, so that’s a big up. But Prof Services -0.26% vs 0.38% and that’s 2x the weight.
  • Just doesn’t pay to be a doctor any more. Here’s CPI- Prof Services y/y.

  • College Tuition and Fees 2.29% from 2.17%.
  • This is a mysterious number. Haven’t found “the culprit” yet.
  • Core CPI ex-housing 0.65% vs 0.71% y/y.
  • Biggest 1m NSA changes are on apparel, misc personal goods, public transportation, lodging away from home (-15% m/m).
  • Median still looks like it will be 0.22% m/m. Not real surprised it’s outliers. The surprise is that it’s in services.
  • This is even more skewed than usual.

  • But again, most things are inflating.

  • Well let’s look at the four pieces breakdown. Food & Energy:

  • Core goods. Probably starting to head higher. But cars and trucks not helping yet.

  • Core services less rent of shelter. Here’s where Professional (medical) Services lives, and is part of the story on the weak CPI.

  • And Rent of Shelter – not a big deal and not surprising, but part of the softish story too.

  • US #Inflation mkt pricing: 2017 1.9%;2018 2.1%;then 2.1%, 2.1%, 2.2%, 2.2%, 2.2%, 2.2%, 2.3%, 2.4%, & 2027:2.5%. This from CPI swaps.
  • Market is pricing an extraordinary amount of stasis in the global price dynamic.

This was a strange report. The miss was a big miss, but there didn’t seem to be any large culprits. The story seems to be in Professional Services, which deceleration caused a 3bp drag in the y/y, and OER, which was a few bps, and Lodging Away from Home. OER is a little surprising, since the Shiller Home Price Index is rising at the fastest pace in a few years, but that generally only passes through with a lag anyway. Higher wages, combined with higher home prices, means that shelter costs are not likely to be decelerating meaningfully any time soon. But, they recently have decelerated a little bit – we think it’s just coming back to model, however.

The Professional Services deflation is a conundrum I’ve commented on in the past. Part of this is probably compositional since the older/more experienced physicians are retiring rather than deal with the new healthcare regime, but the magnitude is surprising. Some of this might be a drag due to ObamaCare phase-ins and the fact that pretty much everyone now pays out-of-pocket for routine care because of high deductibles. But it strikes me as odd that doctors would respond to a decline in business by dropping prices. There may, though, be some other dynamic that is getting into the data – for example perhaps doctors, sympathetic to their patients’ plight, are dropping prices for out-of-pocket expenditures while hiking them (or upcoding) for insurance claims. In any event, this is passing strange. It seems unlikely that doctors’ prices are going to be declining in the long term, given the aging of the US population. But it’s in the data now, and it’s part of that hefty left tail to the distribution of prices.

But most prices are still rising quickly, and median inflation is right around 2.3% and accelerating. The Fed will tighten today, and likely tighten more in 2018 than the market currently expects unless the market breaks. And that’s really what is being priced: some chance the Fed hikes 4 times, and some chance they stop hiking because the stock market begins to return to something approximating fair value.

(And let’s not fully dismiss that latter point. The equity market is delighted with everything at the moment, but the likely failure of the reconciliation committee to produce a tax bill that both House and Senate can pass, and which can be signed by the President, will be discouraging. Currently the market acts as if this is a rubber-stamp process but remember, both tax bills passed by narrow margins, and have dramatic differences that each house required to get the bare majority. Either some Republicans will be asked to suck it up and vote for a bill with components they refused initially, or the tax bill will fail.)

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