Below you can find a recap and extension of my post-CPI tweets. You can 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.
- CPI -0.7%, core +0.2%. Ignore headline. Annual revisions as well.
- Core +0.18% to two decimals. Strong report compared to expectations.
- Core rise also off upwardly-revised prior mo. Changing seasonal adj doesn't affect y/y but makes the near-term contour less negative.
- y/y core 1.64%, barely staying at 1.6% on a rounded basis.
- Core for last 4 months now 0.18, 0.08, 0.10, 0.18. The core flirting with zero never made a lot of sense.
- Primary rents 3.40% from 3.38% y/y, Owners' Equiv to 2.64% from 2.61%. Small moves, right direction.
- Overall Housing CPI fell to 2.27% from 2.52%, as a result of huge drop in Household Energy from 2.53% to -0.06%. Focus on the core part!
- RT @boes_: As always you have to be following @inflation_guy on CPI day >>Thanks!
- A bit surprising is that Apparel y/y rose to -1.41% from -1.99%. I thought dollar strength would keep crushing Apparel.
- Also New & Used Motor Vehicles -0.78% from -0.89%. Also expected weakness there from US$ strength. Interesting.
- Airline fares, recently a big source of weakness, now -2.98% y/y from -4.71% y/y.
- 10y BEI up 4bps at the moment. And big extension tomorrow. Ouch, would hate to have bet wrong this morning.
- Medical Care 2.64% y/y from 2.96%.
- College tuition and fees 3.64% from 3.43%. Child care and nursery school 3.05% from 2.24%. They get you both ends.
- Core CPI ex-[shelter] rose to 0.72% from 0.69%. Still near an 11-year low.
- Overall, core services +2.5% (was +2.4%), core goods -0.8% (was -0.8%). The downward pressure on core is all from goods side.
- ...and goods inflation tends to be mean-reverting. It hasn't reverted yet, and with a strong dollar it will take longer, but it will.
- That's why you can make book on core inflation rising.
- At 2.64% y/y, OER is still tracking well below our model. It will continue to be a source of upward pressure this year.
- Thank you for all the follows and re-tweets!
- Summary: CPI & the assoc. revisions eases the appearance that core was getting wobbly. Median has been strong. Core will get there.
- Our "inflation angst" index rose above 1.5% for the 1st time since 2011. The index measures how much higher inflation FEELS than it IS.
- That's surprising, and it's partly driven by increasing volatility in the inflation subcomponents. Volatility feels like inflation.
- RT @czwalsh: @inflation_guy @boes_ using surveys? >>no. Surveys do a poor job on inflation. See why here: http://www.palgrave-journals.com/be/journal/v47/n1/abs/be201135a.html ...
- 10y BEI now up 5.25bps. 1y infl swaps +28bps. Hated days like this when I made these markets. Not as bad from this side.
- Incidentally, none of this changes the Fed outlook. Median was already at target, so the Fed's focus on core is just a way to ignore it.
- Once core rises enough, they will find some other reason to not worry about inflation. Fed isn't moving rates far any time soon.
- Median CPI +0.2%. Actually slightly less, keeping the y/y at 2.2%.
What a busy and interesting CPI day. For some months, the inflation figures have been confounding as core inflation (as always, we ignore headline inflation when we are looking at trends) has consistently stayed far away from better measures of the central tendency of inflation. The chart below (source: Bloomberg), some version of which I have run quite a bit in the past, illustrates the difference between median CPI (on top), core CPI (in the middle), and core PCE (the Fed's favorite, on the bottom).
I often say that median is a "better measure of central tendency," but I haven't ever illustrated graphically why that's the case. The following chart (source: Enduring Investments) isn't exactly correct, but I have removed all of the food and beverages group and the main places that energy appears (motor fuel, household energy). We are left with about 70% of the index, about a third of which sports year-on-year changes of between 2.5% and 3.0%. Do you see the long tail to the left? That is the cause of the difference between core and median. About 12% of CPI, or about one-sixth of core, is deflating. And, since core is an average, that brings the average down a lot. Do you want to guide monetary policy on the basis of that 12%, or rather by the middle of the distribution? That's not a trick question, unless you are a member of the FOMC.
Now, let's talk about the dollar a bit, since in my tweets I mentioned apparel and autos. Ordinarily, the connection between the dollar and inflation is very weak, and very lagged. Only for terribly large movements in the dollar would you expect to see much movement in core inflation. This is partly because the US is still a relatively closed economy compared to many other smaller economies. The recent meme that the dollar's modest rally to this point would impress core deflation on us is just so much nonsense.
However, there are components that are sensitive to the dollar. Apparel is chief among them, mainly because very little of the apparel that we consume is actually produced in the US. It's a very clean category in that sense. Also, we import a lot of autos from both Europe and Asia, and they compete heavily with domestic auto manufacturers. As a consequence, the connection between these categories and the dollar is much better. The chart below shows a (strange) index of New Cars + Apparel, compared to the 2-year change in the broad trade-weighted dollar, lagged by 1 year - which essentially means that the dollar change is 'centered' on the change in New Cars + Apparel in such a way that it is really a 6-month lag between the dollar and these items.
It's not a day-trading model, but it helps explain why these categories are seeing weakness and probably will see weakness for a while longer. And guess what: those categories account for around 7% of the "tail" in that chart above. Ergo, core will likely stay below median for a while, although I think both will resume upward movement soon.
One of the reasons I believe the upward movement will continue soon is that housing continues to be pulled higher. The chart below (source: Enduring Investments using Bloomberg data) shows a coarse way of relating various housing price indicators to the owners' rent component of CPI.
We have a more-elegant model, but this makes the point sufficiently: OER is still below where it ought to be given the movement in housing prices. And shelter is a big part of the core CPI. If shelter prices keep accelerating, it is very hard for core (and median) inflation to decline very much.
One final chart (source Enduring Investments), relating to my comment that our inflation angst index has just popped higher.
This index is driven mainly by two things: the volatility of the various price changes we experience, and the dispersion of the price changes we experience. The distribution-of-price-changes chart above shows the large dispersion, which actually increased this month. Cognitively, we tend to overlook "good" price changes (declines, or smaller advances) and recall more easily the "bad", "painful" price changes. Also, we tend to encode rapid up-and-down changes in prices as inflation, even if prices aren't actually going anywhere much. I reference my original paper on the subject above, which explains the use of the lambda. What is interesting is the possibility that the extremely low levels of inflation concern that we have seen over the last couple of years may be changing. If it does, then wage pressures will tend to follow price pressures more quickly than they might otherwise.
Thanks for all the reads and follows today. I welcome all feedback!
You can follow me @inflation_guy!
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