Summary of My Post-CPI Tweets

By: Michael Ashton | Wed, Sep 16, 2015
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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. And sign up to receive notice when my book is published! The title of the book is What's Wrong with Money?: The Biggest Bubble of All - and How to Invest with it in Mind, and if you would like to be on the notification list to receive an email when the book is published, simply send an email to WWWM@enduringinvestments.com.

Also note that I have been invited to be a guest on "What'd You Miss?" today at 4pm ET. Catch it!

There wasn't a lot that was new or different in this figure. Housing continues to be the main strain on consumer budgets, as housing costs continue to rise and, given the rise in housing prices generally, this ought to continue. On the other hand, the main drag to core continues to be in the core goods component, and this ought to continue for a while. However, I don't believe it will intensify, so for a while core (and more importantly, median) inflation will just creep up gradually. At some point, core goods will revert higher, and at that point core inflation will move with more alacrity. The timing on this appears somewhat far off, however.

That said, two other points need to be made today.

The first point is that the Federal Reserve will either raise rates tomorrow, or they will not, and this number has virtually no bearing on that. This Fed does not care very much about inflation, which is why they focus on a number (core PCE) which is not only the softest of the available series but also currently is very clearly too low based on a number of temporary effects. Core PCE has a lot to recommend it theoretically. But myopic focus on it (and any discussion at all of headline inflation, which is near zero only because of the oil price crash) can only mean that Federal Reserve policymakers are biased to be doves. But we already knew that. Moreover, if the Fed raises rates tomorrow and does it without removing the quantities of excess reserves in the system, they really aren't doing much. At least, not much that is helpful.

The second point is that the inflation market continues to price dramatically different inflation over the next few years than we are likely to get. Either energy prices are going to continue to crash - in which case buoyant core inflation will still result in low headline inflation, which is what trades in the market - or they are going to stop crashing, in which case inflation expectations are far too low. There is virtually no chance that core inflation declines any time soon. I can make a case that core will only converge to near median, and then go flat, but unless housing collapses suddenly and unexpectedly core inflation is not going lower. (Of course, one-off effects like the medical care effect can still pervert the core numbers from time to time, which is why I focus on median, but this is inherently difficult to forecast and the one-off effects of course might also be in the upward direction).

 


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Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA
E-Piphany

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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