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.
- Core CPI+0.23% m/m is the story, with y/y upticking to 1.754% (rounded to +1.8%). This was higher than expected, by a smidge.
- Core services +2.4% y/y down from 2.5%. But core goods -0.2%, up from -0.5% last mo and -0.8% two months ago. Despite dollar strength!
- Core ex-housing rose to 0.91% y/y from 0.69% at the end of 2014. Another sign core inflation has bottomed and is heading back to median.
- The m/m rise of 0.20% in core ex-shelter was the highest since Jan 2013.
- Primary rents 3.53% y/y from 3.54%; OER 2.693% from 2.687%. Zzzzz...story today is outside of housing, which is significant.
- Accelerating major groups: Apparel, Transport, Med Care, Recreation (32.1% of index). Decel: Food/Bev, Housing, Educ/Comm, Other (67.9%)
- ...but again, in housing the shelter component (32.7% of overall CPI) was unch at ~3% while fuels/utilities plunged to -2.26% from flat.
- [in response to a question "Michael we have been scratching our heads on this one... is it some impact of port strike do you think?"] @econhedge I don't think so. But core goods was just too low. Our proxy says this is about right.
- @econhedge w/in core goods, Medical commodities went to 4.2% from 3.9%, new cars from 0.1% to 0.3%, and Apparel to -0.5% from -0.8%.
- @econhedge so you can argue Obamacare effect having as much impact as port strike. But it's one month in any case. Don't overanalyze. :-)
- Medicinal drugs at 4.46% y/y. In mid-2013 it was flat. That was a big reason core CPI initially diverged from median. Sequester effect.
- @econhedge Drugs 1.70%, med equip/supplies 0.08% (that's percentage of overall CPI). 8.7% and 0.4% of core goods, respectively.
- Median should be roughly 0.2%. I have it up 0.21% m/m and 2.22% y/y, but I don't have the right seasonals for the regional OERs.
- Further breakdown of medical care commodities: the biggest piece was prescription drugs, +5.74% y/y vs 5.19%. The other parts were lower.
The main headline of the story is that core inflation rose the most month-over-month since May. After a long string of sub-0.2% prints (that sometimes rounded up), this was a clean print that would annualize to 2.7% or so. And it is no fluke. The rise was broad-based, with 63% of the components at least 2% above deflation (see chart, source Enduring Investments, and keep in mind that anything energy-related is not part of that 63%) and nearly a quarter of the basket above 3%.
This is no real surprise. Median has consistently been well above core CPI, which implied some "tail categories" were dragging down core CPI. These tail categories are still there (see chart, source Enduring Investments), but less than they had been (compare to chart here). Ergo, core is converging upward to median CPI. As predicted.
The next important step in the evolution of inflation will be when median inflation turns decisively higher, which we think will happen soon. But that being said, a few more months of core inflation accelerating on a year/year basis will get the attention of the moderates on the Federal Reserve Board. I don't think it will matter until the doves also take notice, and this is unlikely to happen when the economy is slowing, as it appears to be doing. I don't think we will see a Fed hike this year.
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