The following is a summary and further explanation of my tweets following today's CPI release:

• core #inflation +0.167, a smidge higher than expected but basically in line. Dragged down by medical care (-0.13%).
• Housing #inflation a solid 0.3%...this part is, as we expected, accelerating.
• Core commodities still dragging down overall core, now -0.2% y/y while core services still 2.3%.
• I still think Owners' Equiv Rent will get to our year-end target but core goods not behaving. Have to lower our core CPI range to 2.5%-2.8%
• That 2.5%-2.8% still much higher than Street. Still assumes OER continues to accelerate, and core goods drag fades. Fcast WAS 2.6-3.0.
• Note that CPI-Housing rose at a 2.22% y/y rate, up from 1.94% last month. Highest since late '08 early '09. Acceleration there is happening.
• Major #CPI groups accel: Housing, Trans, Recreation (63.9%), Decel: Food/Bev, Apparel, Med Care, Educ/Comm (32.7%)
• Overall, IMO this CPI report is much more buoyant than expected. Core goods is flattering some ugly trends.

The important part of this CPI report is that CPI-Housing is finally turning up again, as I have been expecting it would "over the next 1-3 months." Hands down, the rise in housing inflation (41% of overall consumption) is the greatest threat to effective price stability in the short run. Home prices are rising aggressively in many places around the country, and it is passing through to rents. Primary rents (where you rent an apartment or a home, rather than "imputed" rents) are up at 2.8% year/year, the highest level since early 2009, but not yet showing signs that it is about to go seriously vertical. Some economists are still around who will tell you that rapidly rising home prices are going to cause a decline in rents, as more rental supply comes on the market. That would be a very bizarre outcome, economically, but it is absolutely necessary that this happen if core inflation isn't going to rise from here.

The last 7 months of this year see very easy comparisons versus last year, when CPI rose at only a 1.6% annualized pace for the May-December period. Only last June saw an increase of at least 0.20%. So, even with a fairly weak trend from here, core CPI will rise from 1.7% year/year. If each of the last 7 months of this year produces only 0.2% from core CPI, the figure will be at 2.2% by year-end. At 0.25% monthly, we'll be over 2.5%; at 0.3% per month core CPI will be at 2.9% by year-end. So our core inflation forecast, at 2.5%-2.8%, is not terribly aggressive (and if we are right on housing inflation, it may be fairly conservative).

We have not changed our 2014 expectation that core CPI will be at least 3.0%.

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