Summary of My Post-CPI Tweets

By: Michael Ashton | Fri, May 22, 2015
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Here 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.

There is no doubt that this is a stronger inflation print than the market expected. Although the 0.3% print was due to rounding (the first such print, though, since January 2013), the month/month core increase hasn't been above 0.26% since January 2008 and it has been nearly a decade since 0.3% prints weren't an oddity (see chart, source Bloomberg).

CPUPXCHG
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You can think of the CPI as being four roughly-equal pieces: Core goods, Core services ex-rents, Rents, and Food & Energy. Obviously, the first three represent Core CPI. The breakdown (source: BLS and Enduring Investments calculations) is shown below.

Core goods, Core services ex-rents, Rents, and Food & Energy

Note that in the tweet-stream, I referred to core services being 2.4%-2.5% since August. With the chart above, you can see that this was because both pieces were pretty flat, but that the tame performance overall of core services was because services outside of rents was declining while rents were rising. But core services ex-rents appear to have flattened out, while housing indicators suggest higher rents are still ahead (Owners' Equivalent Rent, the bigger piece, went to 2.77%, the highest since January 2008). Core goods, too, look to have flattened out and have probably bottomed.

So the basic story is getting simpler. Housing inflation continues apace, and the moderating effects on consumers' pocketbooks (one-time medical care effects, e.g., which are now being erased with big premium hikes) are ebbing. This merely puts Core on a course to re-converge with Median. If core inflation were to stop when it got to median, the Fed would be very happy. The chart below (Source: Bloomberg) supports the statement I made above, that median inflation has been between 2% and 2.4% since 2011. Incidentally, the chart is through March, but Median CPI was just released as I type this, at 2.2% y/y again.

CLEVCPIA Index
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But that gentle convergence at the Fed target won't happen. Unless the Federal Reserve acts rapidly and decisively, not to raise rates but to remove excess reserves from the banking system (and indeed, to keep rates and thereby velocity low while doing so, a mean trick indeed), inflation has but one way to go. Up. And there appears little risk that the Fed will act decisively in a hawkish fashion.

 


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Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA
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Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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