Post-CPI Summary

By Michael Ashton

Below is a summary of my post-CPI tweets.

  • OK, 20 minutes to CPI. Let’s get started.
  • Although chatter isn’t part of the CPI, it’s interesting to me as a CPI guy. The chatter seems less this month than last month (maybe because of two readings <0.2%). I guess no easy ‘cell phone story’ to latch onto.
  • Last month there was of course that talk about cell phones, and the jump in core did excite breakevens…a little. 10y breaks now at 2.18%, highest in 4 years. But, as I recently pointed out, You Haven’t Missed It.
  • Consensus expectations this month are for 0.19 on core or a little softer. Y/Y will rise to 2.2% if core m/m is 0.13 or above. Outlier of 0.23 would move us to 2.3% and be a surprise to many.
  • Average over last 6 months is 2.56% rate. I saw a funny article saying ‘but that’s due to cell phones.’ Of course, the m/m rate is not due to cell phones dropping off from March of last year. Median CPI is at 2.48%. So this is not the new normal. It’s the old normal.
  • No one is much more bullish than expecting an 0.2% every month…that’s a 2.4% annually; most economists see that as something close to the high of sustainable inflation. But again, that’s the old normal. It just seems new because it has been a LONG time since we’ve been higher.
  • They’re wrong on that! Just not sure how soon this all comes through.
  • So last month, in addition to the bump in core services y/y (because of cell phones), core goods also moved to -0.3% from -0.5% and -0.7% the prior mo. The lagged weakness in the dollar, along with the rise in goods prices caused by trucker shortages, should be showing up here.
  • Lodging Away from Home took a big y/y jump last month, but it’s a volatile category with a small weight. It’s usually an excuse to people who expected something different on the month.
  • I continue to watch medical care, which is important in core services. Doctor’s services still showing y/y inflation as of last report, but both Doctors Services and Hospital Services rose last mo.
  • 15 minutes until the number!
  • Buying in the interbank market for the monthly reset (for headline) is 250.68.
  • Very weak number. 0.10% on core CPI. y/y ticks up only slightly, to 2.12% from 2.11%.
  • Last 12. Surprising. Note that last April was 0.09% so might be some seasonal issue with April. Sometimes Easter plays havoc, and Easter was early. But that’s usually more a Europe thing.

  • Massive drop in CPI for Used Cars and Trucks. -1.59% m/m, taking y/y to -0.9 from +0.4. That’s odd – very different from what the surveys are saying.
  • The Mannheim Survey actually ticked UP this month.

  • I don’t usually start with Used Cars & Trucks but that jumped out. That’s 2% of the CPI so not negligible.
  • OER m/m was 0.33% vs 0.31% last mo. y/y rose to 3.36% vs 3.26%. Lodging away from home was 0.74% m/m, following 2.31% last mo. And Primary Rents accel to 3.69% y/y from 3.61%. Housing strong.
  • Medical Care 2.21% y/y vs 1.99%. Also strong. Apparel 0.77% vs 0.27%. Recreation 0.27% vs 0.61%, and “other” a little softer. But wow, could this all be used cars? It looks like a strong number on the internals.
  • 10-year Breakevens are down 2bps. But I think they’re going to come back. This doesn’t look like the weak print we saw at first. Although I’m still drilling.
  • CPI Medical. Should keep rising.

  • That’s driven by physician’s services, out of deflation. hospital services still trendless around 4.5%

  • But don’t let them tell you this is unusual. It’s a large jump for OER to be sure, but housing prices continue to accelerate higher. Not at all surprising to see rents and OER stop decelerating.

  • here’s OER vs our model.

  • The Housing major subcategory didn’t rise very much, because Household Energy was weak.
  • Also interesting is CPI Apparel, 0.77% y/y…highest since a burp in Jan-2017 but it hasn’t been sustainably above that level since 2013. However, weak dollar shows up here, and conflict with China?
  • College Tuition stable at 1.90%. I can’t stop staring at the Used Cars number. It’s like a…well…car wreck.
  • Wireless telephone services almost back inflating again!

  • Biggest declines on the month, in core categories of weight>1%: Public Transportation, then Used Cars & Trucks, then New Vehicles, then Recreation.
  • Biggest gainers: Women’s & Girls’ apparel, Household Furnishings and Operations. Not many upside outliers, in other words.
  • And folks, that means Median isn’t going to be as soft. My early guess is 0.22, bringing y/y to virtually match last February’s cycle high at 2.58% or so. That’s what’s really going on. Median category is housing so could be + or – small from my est.
  • Breakevens 1.25bps off the lows. It’ll probably keep going. This is not a weak number in my view.
  • Even CPI-leased cars decelerated. Someone hates cars this month.

  • Today’s report is brought to you by the Young & Restless.
  • Four pieces charts. Food & Energy flat

  • Core goods actually dropped a tenth. Culprit…I dunno…maybe CARS?!?

  • Core services less rent of shelter…stable at 2.32% y/y

  • And the big story on the upside – and less shocking than cars – rent of shelter.

  • Now, the core CPI figure – and the fact that the main upward move was from housing, which is underrepresented in core PCE – means the Fed has less urgency to tighten faster, for now. Median tells a different story.
  • This month, we rolled off an 0.09% from April 2017 and replaced it with an 0.10%. Next month, we will roll off an 0.08% from May 2017. And the next two months after that are 0.14%. Ergo, core will keep rising.
  • Should have gotten to 2.2% on core this month, and didn’t thanks to CARS. But will next month, and 2.3% the month after that, and 2.4% a month or two after that.
  • Markets are just about discounting CURRENT inflation (the chart shows CPI swaps, which aren’t biased lower like breakevens, and Median through last month). But still not discounting FUTURE inflation and no tail-risk premium to them either.

  • US #Inflation mkt pricing: 2018 2.2%;2019 2.2%;then 2.4%, 2.4%, 2.5%, 2.5%, 2.4%, 2.4%, 2.5%, 2.5%, & 2028:2.5%.
  • That’s all for now. Thanks for tuning in!

Today’s CPI report was a strong number masquerading as a weak number. The core figure was polluted by a large one-off move lower in inflation for cars – a move that is, moreover, not evident in private surveys. The fact that this is a one-off caused by an outlier was driven home a few hours later by the Cleveland Fed, who calculated the Median CPI at +0.24%, which pushed the y/y median CPI to 2.60%. That’s the highest level since January 2009, and it underscores that we are really seeing acceleration beyond merely retracing the cell phones and other one-off moves from 2017. On the upside of today’s report was housing, which took a surprising jump higher. But what was surprising was not the rise, but the magnitude of the jump. Housing prices continue to rise, and the rate of increase has been accelerating. There is no question that rising housing prices tend to pressure rents higher, and so the direction is not a one-off. Arguably, the one-month movement was “too much,” but it may have been retracing prior softness as well. The movement in rents took the series away from our model a touch, but there’s nothing saying our model is the “right” answer!

But the right answer overall is that inflation is accelerating. Some of this was simply baked in the cake as easy comparisons cause the y/y number to rise. But not all of it. The question going forward is whether inflation crests here, between 2.2%-2.4% on core CPI and 2.5%-2.7% on median, or carries further. My belief is that it has further to run.

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Gary

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