Summary of My Post-CPI Tweets

By: Michael Ashton | Thu, Nov 17, 2016
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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. Plus...buy my book about money and inflation, published in March 2016. The title of the book is What's Wrong with Money? The Biggest Bubble of All; order from Amazon here.

CPI: Housing and Medical Care

CPI: Food and Beverages; Transportation

CPI: Apparel, Recreation, Education and communication, and Other Goods and Services

FRED Inflation Heat Map

Weight of CPI Base Components by y/y Changes Chart 1

Weight of CPI Base Components by y/y Changes Chart 2

I keep coming back to the housing number. That jump is disturbing, because most folks expected housing to start decelerating. I thought it would level out too (though at a higher level than others felt - roughly where it is now, 3.5% on OER, but it's showing no signs of fading). Here's the reason why. It's a chart of a model of Owners' Equivalent Rent:

Owners' Equivalent Rent

This nominal model is simply the average of models based on lags of various measures of home prices. We were supposed to level off and decline some time ago...but certainly by now. And so far there's no sign of that.

Our model is a bit more sophisticated, but if you rely on lags of nominal variables you're going to get something like this because housing price increases have leveled off (that is, housing prices are still rising, but they're rising at a constant, and slightly slower, rate than they were).

Now, here's the worry. All of these models are calibrated during a time when inflation in general was low, so there's a real chance that we're not capturing feedback effects. That is to say, when broad inflation rises it pushes wages up faster, and that tends to support a higher level of housing inflation. We have a pretty coarse model of this feedback loop, and the upshot is that if you model housing inflation as a spread compared to overall or core inflation, rather than as a level, you get different dynamics - and dynamics that are more in tune with what seems to be happening to housing inflation. Now, it's way too early to say that's what's happening here, but with housing at our forecast level and still evidently rising, it's time to start watching.

 


An administrative announcement about upcoming (free!) webinars:

On consecutive Mondays spanning November 28, December 5, and December 12, at 11:00ET, I will be doing a series of one-hour educational seminars on inflation. The first is "How Inflation Works;" the second is "Inflation and Asset Classes;" and the third is "Inflation-aware Investing." These webinars will also have live Q&A. After each session, a recording will be available on Investing.com.

Each of these webinars is financially sponsored by Enduring Investments.

 


 

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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