A Summary Of My Post-CPI Thoughts

 |  Includes: IYR
by: Michael Ashton

Here are my post-CPI tweets from this morning:

  • CPI #inflation +0.2% core. But here's the thing: that's with housing showing unexpected softness. And housing markets are bubbling.
  • Unrounded core inflation 1.698%. That's the last we'll see of 1.6% handles for years.
  • Core inflation actually barely rounded up, at +0.155% m/m. But, again, that's with housing inexplicably weak.
  • Core services 2.4%. Core goods still plodding along at -0.2%, and holding overall core inflation down. That won't persist.
  • CPI major groups accelerating: Food/Bev., Housing, Apparel, Transp., Rec., Educ./Comm. (89.5%). Decelerating: Medical and Other (10.5%).
  • …But housing only accelerated b/c household energy. OER was unch at 2.2% and primary rents 2.8% from 2.9%. That's a quirk.
  • Certainly nothing in today's inflation data to scare the Fed into a faster taper.
  • Bonds are breaking lower; although the convexity overhang has been worked off, we never got the expected bounce! Not sure why they're weak.
  • Higher rates->higher velocity->more inflation pressure, ironically. In this case, higher rates won't affect money supply as offset to that.

Of all of the places I expected to see a downside surprise, housing was not it. Of course, econometric lags aren't the same as destiny, so the fact that the leading series all turned higher at the "right time" to cause a rise in Owners' Equivalent Rent right about now is helpful information for investing, but not necessarily a timing tool. At 2.2%, OER is still well above core inflation and primary rents at 2.8% are as well. But core goods continue to drag on the overall core inflation number (and to hold core inflation well below median inflation).

I feel I should nudge lower my forecast for 2013 core inflation again, to a range of 2.4%-2.7% from 2.5%-2.8%. I am doing this for two practical reasons related to housing. One is that every month that passes without the expected acceleration is one less month over, which inflation can accelerate to reach my year-end target.

The other is that every month that passes without the expected acceleration increases the odds that I'm simply wrong, and something is holding down rents even though home prices are launching higher. I don't think that's true, but I want to be cognizant of overconfidence bias. However, at this point my nudging of the forecast is more about the former point: my 2014 forecast range remains 3.0%-3.6% for core.