Below is a summary of my post-CPI tweets.
- A few minutes to CPI. Consensus 0.2%, 2.2% y/y on core, pretty much on the dot. That’s slightly lower on core than last month, which ALMOST rounded to 2.3%, but dropping off a strong Dec ’17. Remember Median is 2.82%, near the highs.
- it will be hard to get a ‘handle surprise’ on core CPI today. But watch Apparel, which has been weirdly weak despite tariff tensions. Used cars/trucks has been strong for a couple months and is due to be back normal, but not to “retrace” as it was too low before.
- In general, look at core goods, which last month went flat after a long time in deflation. And keep an eye on core-ex-shelter, which is near multi-year highs.
- 21% on core, 2.21% y/y. Basically a consensus number.
- Pretty stable last few months of core.
- Core goods 0.1% y/y, down from 0.2% y/y last month. Core Services unch at 2.9% y/y.
- Core goods right on schedule.
- OER 0.23% m/m, dropping y/y because of base effects back to 3.22%. Had been a y/y bounce last year because of those base effects but now pretty much back to trend. Primary rents 0.20%, 3.48% y/y, also down.
- Inflation bears will point at “Lodging Away from Home,” +2.74% m/m, and say that is an aberration. But it’s really just reversing a very weak recent aberration. Y/y up to 0.91%; had been -1.37%. So ignore those people.
- Pharma was weak, at -0.43% m/m and -0.58% y/y.
- Doctors services also remains fairly low. Hospital Services however accelerated to 3.67% y/y from 3.52% y/y. Overall, Medical Care was roughly steady at 2% y/y.
- Used Cars and Trucks was -0.18%, dropping y/y to 1.43% vs 2.30%. It was due to decelerate, and that’s roughly in line.
- Apparel is back to positive y/y, at +0.3% vs -0.6%, but that’s mostly base effects. Only very small rise this month. That continues to be a head-scratcher. I’d expect to see trade frictions show up in apparel quickly. But this is a Dec number, and so maybe stockpiling pre-xmas.
- Core ex-housing was 1.50% y/y, down slightly from 1.53% y/y last month. That remains near 5-year highs, but still waiting for the break higher.
- Core ex-shelter chart.
- By the way, if you have kids I hope they’re girls. In apparel, Boys’ apparel is +13.1% y/y…Men’s footwear is +4.3%…nothing else is over +0.5%.
- Recreation is a pretty small part of CPI (5.7%), but rose from 0.61% y/y to 1.16% y/y. Inflation in Cable and Satellite Services, Pets and Pet Products, and “Admissions” were the main culprits. Pets are “recreation?” I think of them more as Transportation. Or Food.
- Just kidding.
- College Tuition and Fees +2.7% y/y, up a small amount but continuing to run ahead of headline and core.
- Looks like a regional housing index will be the median category this month, which means my median guess isn’t as sharp. My estimate is 0.23% m/m, making the y/y 2.80% down from 2.83%. Median is a better measure of inflation trend since it ignores outliers.
- This is an important chart. It shows Median CPI (without today’s number, not out yet) vs 10-year inflation swaps. You can see how bearish the market has gotten recently. Some of this is oil but these are 10y swaps so that shouldn’t matter much.
- I almost forgot to mention that Wireless telephone services weakened again to -3.19% from -3.03% y/y. More interestingly, Land-line went to -0.02% from 0.46%. Even more interesting, land-line spending is only about a third as large as wireless. Here’s a chart of landline.
- Let’s wrap this up with the four-pieces charts. First piece is food & energy. Weirdly linear deceleration.
- The piece I think is a very important story going forward: core goods. Out of deflation and I think it’s going higher. This is where trade tensions are most important.
- Core services less Rent of Shelter…still look to be in a downtrend, mostly thanks to medical. If we’re going to have an inflation accident, it should also show up here.
- Rent of Shelter. Going nowhere fast. And that means you’re not getting deflation any time soon.
- Final thought: next month we drop off a +0.35% m/m from core (from Jan ’18), which means it is pretty likely we see a drop in core towards 2%. That makes a Fed hike harder. But then the comparisons get easier, as my 12-month m/m core CPI chart showed.
- Core is unlikely to drop below 2% any time soon, and in my view we’re likely to see 2.5% before 1.9%, and median inflation above 3% before long. But the Fed has a couple months’ reprieve before the choices get tougher.
- That’s all for today. Thanks for tuning in.
Today’s CPI number is an acceptable one for the Fed. Right on the screws, showing no unanticipated accelerations. But also, no decelerations! Next month, core should decelerate, but that is likely to be the last good news for a while on inflation. Now, there are some reasons to think that the upward trend on inflation might be ending sooner than I have thought, and I’ll get into those reasons over the next week or two. But for now, the story is that the Fed has some breathing room to stop and watch for a while, and avoid some critical Presidential tweets while seeming to be principled. The difficult test will come in a few months when inflation starts heading higher even while growth, and stock markets, head lower. It may well be that we have seen the last tightening for a while – if the Fed Chair were Bernanke or Yellen, they’d already be easing, but Powell seems to be made of sterner stuff (but read my prior post about whether there is a Powell put). However, it has been easy up until now, with growth strong enough to take some hikes, inflation heading the wrong direction, and rates below any semblance of neutral. The next year or two is where the Fed’s job gets difficult as they have to navigate crosscurrents.
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