Inflation, But Only Where it Hurts

By Jeffrey Snider of Alhambra

The Consumer Price Index increased 2.74% in February 2017 over February 2016. That was the highest inflation rate registered in this format since February 2012. As has been the case for the past three months, the acceleration of headline inflation is due almost exclusively to the sharp increase in oil prices as compared to the lowest levels last year (base effects). It is the only part of the CPI report which captures anything like it.

The energy price index was up 15.6% year-over-year, compared to an 11.1% increase in January. The gamma of energy and therefore the CPI is already fading, with oil prices having been stuck at $52-$54 during the months of January and February. If WTI remains about where it is now, around $48, the current month (March) will be the last to feature any significant acceleration from oil.

The other parts of the CPI are as they have been consistently throughout. The “core” index, CPI less food and energy, was up 2.2% in February. It was the fifteenth straight month where the core increase was one of 2.1%, 2.2%, or 2.3%. In what is probably the best indication of inflation stripped of energy, the last time the core rate accelerated even slightly was during the second half of 2015.

Continue reading Inflation, But Only Where it Hurts

Good Models and Bad Models

By Michael Ashton

I have recently begun to spend a fair amount of time explaining the difference between a “good model” and a “bad model;” it seemed to me that this was a reasonable topic to put on the blog.

The difference between a good model and a bad model isn’t as obvious as it seems. Many people think that a “good model” is one that makes correct predictions, and a “bad model” is one that makes bad predictions. But that is not the case, and understanding why it isn’t the case is important for economists and econometricians. Frankly, I suspect that many economists can’t articulate the difference between a good model and a bad model…and that’s why we have so many bad models floating around.

The definition is simple. A good model is one which makes good predictions if high-quality inputs are given to the model; a bad model is one in which even the correct inputs doesn’t result in good predictions. At the limit, a model that produces predictions that are insensitive to the quality of the inputs – that is, whose predictions are just as accurate no matter what the inputs are – is pure superstition.

For example, a model of the weather that depends on casting chicken bones and rat entrails is a pretty bad model since the arrangement of such articles is not likely to bear upon the likelihood of rain. On the other hand, a model used to forecast the price of oil in five years as a function of the supply and demand of oil in five years is probably an excellent model, even though it isn’t likely to be accurate because those are difficult inputs to know. One feature of a good model, then, is that the forecaster’s attention should shift to the forecasting of the inputs.

This distinction is relevant to the current state of practical economics because of the enormous difference in the quality of “Keynesian” models (such as the expectations-augmented Phillips curve approach) and of monetarist models. The simplest such monetarist model is shown below. It relates the GDP-adjusted quantity of money to the level of prices.

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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 Continue reading Post-CPI

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.

  • Last CPI of 2016…fire it up!
  • Core +0.23%, a bit higher than expected. Market was looking for 0.16% or so.
  • y/y core CPI rises to 2.21%. The core print was the second highest since last Feb.
  • For a change, the BLS has the full data files posted so brb with more analysis. Housing subcomponent jumped, looking now.
  • Just saw this. Pretty cool. Our calculator https://www.enduringinvestments.com/calculators/cpi.php … pretty cool too but not updated instantly.
    • BLS-Labor Statistics @BLS_gov: See our interactive graphics on today’s new Consumer Price Index data http://go.usa.gov/x9mMG #CPI #BLSdata #DataViz
  • As I said, housing rose to 3.04% from 2.90% y/y. Primary Rents jumped to 3.96% from 3.88%; OER 3.57% from 3.54%.
  • Household energy was also higher, so some of the housing jump was actually energy. But the rise in primary rents matters.
  • Will come back to that. Apparel y/y slipped back into deflation (dollar effect). Recreation and Education steady. “Other” up a bit.
  • In Medical Care, 4.07% vs 3.98%. That had recently retraced a bit but back on the + side. Drugs, Prof. Svcs, and Hospital Svcs all +
  • Medicinal drugs. Not a new high but maybe the retracement is done.

drugs

  • Core services up to 3.1% from 3.0%; core goods -0.6% vs -0.7%.
  • That’s consistent with our view: stronger USD will keep core goods in or near deflation but it shouldn’t get much worse.
  • The dollar is just not going to cause core deflation in the US. Import/export sector is too small.
  • Core ex-housing rose to 1.20% from 1.12%. Still not exactly alarming!
  • Not from this report, but wages are worrying people and here’s why:

atlfedwages Continue reading Post-CPI

CPI’s Positive Numbers

By Jeffrey Snider of Alhambra

The CPI shows once more the difference between meaningful change and the same sorts of positive numbers that have populated the last five years

Consumer prices accelerated again in October 2016, with the overall CPI calculating a 1.64% inflation rate. That is up from 1.46% in September, and the highest since October 2014. The reason is energy prices. For the first time in over two years, the energy component of the CPI was positive year-over-year. Having been as low as -20% in early 2015, and almost -11% this July, the difference in energy is obvious on the overall index.

abook-nov-2016-cpi-energy abook-nov-2016-cpi-v-pce-deflator

In fact, energy prices mainly determine the marginal changes in the total CPI. Though price differences are far more extreme in energy, their scaled effects on the whole index are very clear.

All that means is that consumer prices, according to the CPI, are back to where they were in 2012, 2013, and 2014. In other words, without the big drag from oil and other commodities, the CPI is still shallow. The 2-year change is just 1.81%, bringing into focus the highly unusual nature of this current period. In all prior periods, a sharp downturn was followed by an equally sharp upturn, prices as well as output. These are simple base effects and little more (and that “more” is where prices are doing more harm rather than reflect recovery).

Toward the end of 2006, for example, the energy component of the CPI fell sharply, down a little more than 10% that October, which had the effect of dragging the overall index down from near 4% to just 1.3%. Just two months later, despite energy prices still lagging, the CPI was back above 2.5% and then near 4% again by November 2007 once oil joined the final, mistaken eurodollar rush.

Continue reading CPI’s Positive Numbers

Post-CPI

By Michael Ashton

CPI was good for markets in the short run. But inflation is rising, and that’s bad for markets in the medium-run

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.

  • CPI coming up in 14 minutes. Consensus on core is for a barely 0.2% print, (more like 0.15%). That would keep the y/y barely at 2.3%.
  • Remember to join me at 9am for a (FREE) live interactive video event at http://events.shindig.com/event/tmenduringinvestments
  • okay, core 0.1%, y/y to 2.2%. Yayy! And by the way it was only 0.11% so not close. y/y to 2.21%.
  • core rate is only 1.8% over last 3 months, vs 2.0% over last 6 and 2.2% over last 9. November tightening is wholly out.
  • Housing accelerated, Medical care roughly unch. Educ/Communication dropped. Getting breakdown now.
  • Headline was also soft. Market was 241.475 bid before the number and 241.428 was the print. Still rounded to 0.3% m/m though.
  • Bonds don’t love this as much as I thought they would. 10y note up about 4 ticks after the data.
  • 10y inflation swaps also didn’t do much. Close to 2% for first time in a long, long time.
  • Primary rents 3.70% from 3.78%, I was reading last month. But OER still up, 3.38% from 3.31%.
  • New and used cars -1.16% vs -0.95%, so more weakness there.
  • In Med care: Drugs 5.38% vs 4.59%, ouch. But prof svcs 3.22% vs 3.35%, and hospitals 5.64% vs 5.81%, and insurance 8.37% vs 9.10%.
  • But those are all retracements within trend.
  • Tuition ebbed to 2.32% vs 2.53%, and “information and info processing” -1.98% vs -0.90%. Those two add up to 7% of CPI.
  • I can see why bonds aren’t super excited. This isn’t a trend change. It looks like a pause.
  • ok, have to go get ready for the video event. See you at http://events.shindig.com/event/tmenduringinvestments … in about 10.
  • Probably good news from Median as well. I see 0.17%, bringing y/y down to 2.54% vs 2.61%. But hsg is median category so I may be off.

I covered some stuff in the Shindig event, but it’s worth showing a couple of charts. Here is health insurance. You can see the little drop this month isn’t exactly something that would make you say “whew! Glad that’s over!”

medins Continue reading Post-CPI

Summary (and Extension) Post-CPI

By Michael Ashton

The bottom line for markets in the near-term is that nothing about this number scares policymakers

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.

  • 5 minutes to CPI. Consensus is for core to barely round to 0.2%, and for y/y core to remain at a soft 2.3%
  • I have the “over” there, but the “under” against my friend who thinks it’s gonna be 0.24%.
  • Core CPI +0.09%, y/y drops to 2.20%.
  • Waiting for the breakdown to dig deeper. Housing accelerated y/y, as did Medical care, but Apparel, Rec, Educ/comm all lower.
  • …Housing and Medical care are the big longer-term concerns so the internals might not be as weak as the headline. Taking a look now.
  • Meanwhile Dudley on the tape saying “probably don’t have to do a lot of tightening over time.” Echoes Williams. When doves cry.
  • At the same time Dudley says rate hike is possible in September. Sure, anything is possible. But not with core printing 0.1% m/m.
  • ..in Housing, Primary Rents fell to 3.77% from 3.81% y/y. OER rose to 3.26% vs 3.25%, continuing flat patterns.
  • Those are the biggest parts of housing. Lodging away from home plunged y/y. Where did the rise in housing come from? Household energy.
  • HH energy -1.37% y/y vs -3.02%. That’s 3.8% of the CPI, but not in core obviously. So housing ex-energy was basically flat.
  • Overall Medical Care category rose to 3.99% from 3.65% and 3.17% the month before that. Jumps in every category:
  • Drugs 3.77% (vs 3.40%). Equipment/supplies 0.1% (-0.62%). Prof Svcs 2.86% (2.60%). Hospital 4.41% (4.12%). Health Ins 7.78% (7.10%)
  • Large jumps everywhere in Medical Care. *Discuss.*
  • Apparel still rising y/y, at 0.35%, but won’t really take off until the dollar declines.
  • Overall, core services +3.1% (was 3.2%) and core goods -0.6% (unch).
  • Popular number is core ex-housing. 1.36% y/y vs 1.37%.
  • So overall, despite the weak m/m core number, the big trends remain in place. Housing flat to higher. Medical Care starting to ramp up.
  • A broad array of volatile components dragged m/m CPI down. But 59% of the basket is still accelerating faster than 3%.
  • Biggest monthly falls: motor fuel, car and truck rental, public transp, lodging away from home, and misc pers goods. All <-20% m/m
  • Only category over 20% annualized m/m increase was Infants and toddler’s apparel.
  • These last few facts mean that MEDIAN inflation, a better measure of inflation, will be up 0.24% or so m/m. 2.48% y/y.
  • Ugly pic #1: Health Insurance y/y

insurance Continue reading Summary (and Extension) Post-CPI

Some True Stats About Crime Rates

By Tom McClellan

Some True Stats About Crime Rates

Crime Rates versus CPI Inflation
July 28, 2016

This being a campaign season, you are going to hear a lot of assertions about crime rates and the supposed solutions that various sides are proposing.  So this seems like a good time to share a few bits of truth about crime data in the US, and what it is correlated to, and not.

The chart above shows the best correlation I have found to the crime rate.  The annual growth rate in the Consumer Price Index (CPI-U) is shifted forward by a year to reveal how its movements tend to show up a year later in the crime rate.  The crime rate data shown here are from the The Disaster Center, a web site with a wealth of information gathered from public sources.  The crime rate data are here.

The implication of the chart above is that crime rate data follow the inflation rate.  If inflation rates should rise, experience says that crime rates should also rise.  Saying it another way, the falling crime rates since the peak in 1980 are reliably associated with the falling inflation rate since then.  This data does not cover all of the history of crime in the U.S., only the period of reliable statistics on crime gathered and reported by the FBI.  But it is 55 years’ worth of data, and so at some point we should start to accept that the correlation is valid.

Continue reading Some True Stats About Crime Rates

Post-CPI

By Michael Ashton

Breakeven inflation is low, low, low for more than a decade in the future according to the market. Considerably lower than today’s core inflation.

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, just published! The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • Ah, CPI day!
  • Writing today from the skies above…Pennsylvania maybe? Hi Pennsylvania!
  • Not sure how well this will work…bear with me.
  • Street forecast for core is 0.182% or so m/m, rounding to 0.2% and 2.2% y/y.
  • But if core is only 0.187% m/m, y/y will rise to 2.3% after rounding. So a low hurdle for a “surprise”
  • Since this year core has averaged 0.208% (and 0.243% ex-March), I suspect a good chance of a 2.3% y/y print.
  • Over the next 2 months we have comparisons of 0.173% and 0.155% from year-ago, so core likely rises further.
  • As a reminder, median CPI is already at 2.53% and a 7-year high so such a move in core isn’t a shock.
  • But all that is in the future. We get today’s CPI in 14 minutes.
  • Note my response to tweet messages will be worse than normal today… from 35,000 feet this is a bit wonky.
  • 17% on core. y/y to 2.23% from 2.24%. Be still my heart.
  • Have to wait for the breakdown…not trusting numbers at this altitude. But looks like Medical Care jumped. Not sure what went dn then.
  • OK, Housing 2.39% from 2.38%. Apparel 0.42% from 0.53%; Medical Care – 3.65% from 3.17%! Small drips elsewhere.
  • Core services stayed 3.2% and core goods dripped to -0.6% y/y.
  • Within Housing: Primary rents 3.81% from 3.80%. Should keep rising. OER 3.25% from 3.26% ditto.
  • Big jump in Lodging Away from Home: small category and volatile but excites some people. Not me.
  • Motor vehicles -0.82% from -0.50%, still dragging on core goods.
  • In Medical Care: Drugs 3.40% from 2.34%. Yes, >1% acceleration in y/y. Volatile but…
  • Balancing that a bit was Professional Services 2.60% from 2.81%. But Hospital Services 4.12% from 3.25%.
  • And Health Insurance? +7.10% vs 6.30%. Thanks, ACA.
  • With drugs pushing core goods higher, not sure what was going the other way enough to make core goods decelerate some.
  • Good Lord they just said we’re over Wisconsin. Already?
  • Take this projection for Median CPI with a grain of salt, but looks to me like +0.19% and the annual rate stays 2.5%.
  • biggest monthly declines were toddlers’ apparel, jewelry and watches, footwear, and used cars/trucks.
  • biggest monthly gains in fuel oil, motor fuel, car and truck rental, and medical care commodities (drugs).
  • core ex-housing still fairly low at 1.37%.
  • Overall – core and median inflation still are in rising trends, but nothing particularly alarming about this month’s figure.
  • Certainly, nothing that is going to turn Pres. Mester from talking about helicopter drops to talking about tightening.
  • That’s all for now…thanks for bearing with me.
  • Be sure to look at our Crowdfunder equity raise: https://www.crowdfunder.com/enduring-investments-llc … The subscription package is up and live!

Last month’s core inflation number was not pretty. Medical care rose, rents jumped, and in general it was a sloppy mess. This month is not like that. The story is one of continuing trends: a trend to higher rents, higher medical care inflation; continued weakness in apparel and transportation and other core goods. The key point though is that there is no sign that inflation is about to fall. Whether bottom-up, aggregated from the detailed pricing data, or top-down, looking at money supply growth and possible velocity outcomes, the uptrend in prices looks steady.

While that could change, if interest rates continue to decline and depress money velocity even further, it can’t be the null hypothesis at this point. What is amazing is that the market, in its pricing of inflation, has made that the null hypothesis. Breakeven inflation is low, low, low for more than a decade in the future according to the market. Considerably lower than today’s core inflation. It is a bet that looks increasingly out-of-whack.

Post-CPI

By Michael Ashton

A day after the FOMC chose to stand pat on interest rates, core inflation pushed back higher

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, just published! The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • CPI coming up in 15 mins. Consensus is +0.3% headline +0.2% core, putting y/y core up to 2.2% again.
  • Base effects for core suggest better chance for y/y rise for next 4mo or so.
  • Stay tuned, 10mins to CPI. In the meantime why not check out our Crowdfunding campaign? https://www.crowdfunder.com/enduring-investments-llc … (Accredited inv only)
  • Core CPI +0.203% m/m; y/y rises to 2.235%.
  • Core goods remains at -0.5% y/y; core services rises to 3.2%, highest since 2008.
  • Housing jumped to 2.37% y/y from 2.11%. Looking at breakdown to see if that’s in rents or elsewhere in housing.
  • Medical Care had fallen from 3.29% y/y to 2.98% last month. Back up to 3.17%, which is the general trend: higher.
  • Apparel flipped to +0.58% y/y vs -0.57% y/y. Only about 5% of core CPI, but a bellwether we’ve been watching (with little result so far).
  • tweeted this earlier…note that strong base effects lifted y/y CPI but next 3 months comparison also easy.

last12 Continue reading Post-CPI