Post-CPI Summary

By Michael Ashton

Below is a summary of my post-CPI tweets.

  • OK, 15 minutes to CPI. Here goes.
  • Last mo, we had an 0.17% on core m/m, exactly on expectations but after a weak 0.10% in April.
  • The Dec/Jan 0.24%/0.35% seem far away, but even farther away are the 0.14%s of last June and July. That is, comps remain relatively easy.
  • Really no big surprises last month. Still haven’t seen core goods acceleration or any sign of tariff effects. Core ex-housing is rising but still quite low.
  • In fact, I think the big story going forward, not this month per se but for the balance of the year and 2019, is what happens to core goods prices. With trucking prices rising aggressively, tariffs up and globalization down, I’d expect to see movement there.
  • In that vein, keep an eye on Apparel, which though small is an important signal on core goods.
  • This month, economists are looking for 0.18% on core, pushing y/y JUST BARELY to 2.3% with rounding. The consensus nailed it last month.
  • My thesis is that we should be seeing more core inflation than that going forward. So far, that thesis has been unrewarded but I really didn’t expect a whole lot to come through until the second half. This first half was just catching up from base effects of 2017.
  • You can see that median is basically back on the slow uptrend from 2014-15-16-17. Inflation will keep rising. The only question (which would be a scary outcome) is whether it accelerates past that former trend into a new self-feeding inflation cycle. No sign of that yet.

  • Just 5 minutes til showtime.
  • 16% m/m on core, just barely pushing y/y to 2.3%, 2.255% to three decimals on the NSA core index…
  • Bloomberg being really slow posting subcomponent info.
  • Here’s the last 12 core CPIs. Certainly nothing seems terribly alarming here on the surface.

  • OK, Bloomberg. Gonna scrape the data myself. BRB.
  • Breakevens are unimpressed. 10y breaks were +1 before the number, mostly a reaction to the energy plunge and rebound, and are +0.5 now. But sometimes takes a bit for people to dive into the numbers.
  • ..so we see Used cars and trucks are +0.72% m/m, yay! Finally some movement. Still -0.66% y/y, so not showing the inflation of the private surveys. Private surveys have noted some shift in used car composition, and it may be that the BLS just isn’t correcting for that.
  • Owners’ Equivalent Rent was +0.25% m/m for the second month in a row, but that caused y/y to decelerate to 3.37% from 3.41%. That’s interesting because last month the rise in OER was a big chunk of the rise that we got so…something else was moving this month.
  • Primary Rents also decelerated, to 3.58% from 3.63%. That’s actually lower than the y/y has been for a while as this continued to decelerate. But it’s not going to collapse while housing prices continue to boom.
  • Medical Care accelerated further, to 2.45% from 2.38% y/y. That’s not as big a jump as last month, but it’s the right sign. Still low. Pharma retreated a bit but doctor’s services picked up the slack.

  • Apparel dropped on the month, pushing y/y down to 0.6% from 1.4%. So canary on core goods is still chirping.
  • Bloomberg still hasn’t updated the core goods and core commodities figures…odd. Anyway, they’re -0.2% on core goods (tiny acceleration) and 3.1% on core services (tiny acceleration) on a y/y basis.
  • Lodging Away from Home, which surged last month to 4.4% y/y, plunged to 1.6% y/y this month.
  • Core ex-shelter rose to 1.41%, highest since mid-2016. That’s still low, but it’s what we want to watch along with core goods. It hasn’t been above 2% since 2012. Hasn’t even been close.

  • This is interesting…wireless telephone services inflation is positive. It’s not like that NEVER happens but this time we might go higher. After you go to infinite data…how do you improve quality dramatically? And it’s quality that drives this series lower.

  • Core goods’ rise is encouraging for inflation…but still a ways to go before it gets to +1%. However it’s on model at the moment.

  • Will have the four-pieces charts in a moment. But while I’m waiting on the calculator…this month’s data is interesting because it was not housing. Some of the rise in core was due to new and used cars rebounding, but not enough to offset the deceleration in housing. >>
  • That may mean that inflation is broadening to more categories outside of the ones that have been driving inflation for a while. Core ex-shelter’s rise is something to watch. That’s what inflation actually looks like – it’s not dramatic, and not isolated in a few categories.
  • inflation markets are tres unimpressed. 10y breakevens now down on the day.
  • We’re not really seeing a broadening in this diffusion measure, so it may just be that the left-tail deflationary stuff is going away. A tightening of the distribution, that is.

  • OK four pieces. Piece 1: Food & Energy. Good for owners of TIPS, but mean-reverting so we mostly ignore for forecasting.

  • Core goods, Piece 2, I’ve already shown. Rising and will keep rising.

  • Piece 3: Core services less rent of shelter. Starting to look interesting. The 3% level is key.

  • Piece 4: Rent of Shelter. Still elevated. It’s done the heavy lifting on inflation for a while and probably won’t do much more for a while. Continued acceleration in core will rely on ex-shelter core services, and on core goods. Both of which seem to be rising.

  • Bottom lining: Once again, no big surprises here and nothing that will alter the Fed’s trajectory. But the underlying pressures here are pretty clear and show no signs of waning. We are not going to gently converge on 2% core PCE.
  • What I said at the beginning remains the key question: are we just going back to the rising – but slowly rising – inflation trend from 2014-2017, or will we start to accelerate above that trend?
  • Acceleration above that trend would be very concerning, unless it was caused by one-offs (like cell phones and other one-offs caused the 2017 departure on the downside). It would indicate that inflation has moved into a self-reinforcing phase.
  • I suspect that’s where we are headed. But so far, the evidence that we are there doesn’t exist (there’s no contrary evidence either – it’s just unknown at this point).
  • Early look at median…my estimate is 0.23% m/m. If I am right, this takes the y/y to 2.80%. This will be really dramatic!

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Gary

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