Summary Of My Post-CPI Thoughts

|
Includes: RINF
by: Michael Ashton

Below is a summary of my post-CPI tweets:

  • Good morning and welcome to another wonderful CPI day!
  • Three notes before CPI prints in 17 minutes: First, the market is expecting a "soft" 0.2% core (something like 0.16%, rounding up).
  • Second: If we get exactly 0.2% core, then y/y will round higher to 2.3%. Third: If we get exactly 0.3%, y/y core will round to 2.4%.
  • Highest core print since the crisis was 2.32% in 2012. We have a shot of exceeding that today with a robust print.
  • 10 minutes to CPI...
  • ...whoopsie, core CPI +0.3%. Actually 0.28% puts y/y at 2.34%. Yayy, a new post-crisis record!
  • Ouch, seems like a big jump in y/y medical care, waiting for the breakdown. If so, that makes core PCE jump even more (again).
  • So back to back months, we've had 0.29% and 0.28%. I hate to say I told you so but...
  • I said 2.33%, actually 2.34%. We were very close to printing 2.4% y/y and setting off panic at the Fed. Which is about four years overdue.
  • I should say four years and $2 trillion overdue.
  • [retweet from @boes_] Core consumer price inflation ex-shelter really accelerating: was 1.6% year over year in February.
  • Cdq368CW8AALaxb Core CPI. What, me worry?
  • whatmeworry While I wait for my sheets to calculate, let me stress this is not meaningless for the FOMC meeting today.
  • Arguments for waiting another meeting before raising rates are very thin.
  • I have got to put this database on a faster computer. OK, core services 3.1% from 3% and core goods +0.1% from -0.1%.
  • First positive y/y in core goods in two years.
  • Housing: 2.12% from 2.10%. Primary rents (3.68% from 3.71%) and OER (unch at 3.16%) are not the drivers of the core jump.
  • Lodging away from home 4.19% vs. 2.67%, but that's a small piece of CPI (<1%).
  • Apparel had a big jump in y/y rate to 0.89% from -0.53%, but again apparel as a whole is 3% of headline, 4% of core.
  • Medical care: 3.50% from 3.00%. Yep.
  • Drugs 2.34% from 2.21%. Professional services 2.54% from 2.08%. Hospital services 4.90% from 4.32%. Health insurance 5.97% from 4.76%. Ouch.
  • Med care is ~10% of core, so that 50bp jump is 0.05% on core.
  • And remember, medical care gets a higher weight in the Fed's preferred measure, core PCE.
  • U-G-L-Y CPI ain't got no alibi. It's ugly (woot! woot!), it's ugly.
  • The good news is pretty thin gruel. Median CPI should be +0.22% or so, keeping y/y around 2.42%. At least it isn't running away yet.
  • Also, next month we roll off a 0.21% from the y/y figure. So the hurdle will be higher for an uptick in core CPI.
  • Like I said, thin gruel. There can be no doubt whatsoever that deflation risks are zero for the foreseeable future.
  • Stocks are doing tremendously well with this, only -9 points or so S&P futures. This is awful news for equities.
  • ...but some observers like to spin "rising inflation" as "sign of robust growth." Nope. See "1970s" in your encyclopedia.
  • The only way this is good news is if you recently wrote a book on inflation. Which, as it turns out, I did.
  • Distribution of price changes. You can be forgiven for seeing this as giving the Fed the finger.

distribution

As much as I like to talk, there's just not a lot more to say. This number is awful, as it not only was well above expectations (the m/m figure was about double the rise which analysts expected), but also it wasn't driven by shelter, but rather by apparel (a little) and - worst of all - medical care. Here is a chart of y/y medical care (Source: Bloomberg).

medcare

Here is a subcomponent of medical care, "professional services" (Source: Bloomberg).

proserv

And finally, again, here's the context. This chart (Source: Bloomberg) shows median inflation (top line), core inflation converging on it (middle line), and core PCE shooting higher (bottom line). Note that the top and bottom lines are not updated for the most recent month.

threeinflchart

At this hour, stocks are inexplicably unchanged. This is awful news for stocks, which tend to be most highly valued when inflation is low and stable and the Fed is quiescent. Now we have inflation that is moderate, but rising, and a Fed which is not only active, but with numbers like this may eventually become more so. If they do not, it is only because growth is weak (and weakening)... and someone please explain to me why that is a positive environment for stocks? One can make an argument that bonds can do okay if growth flags (even though growth does not cause or lead inflation), because real rates are too high for the level of nominal rates and that could conceivably reach equilibrium by TIPS rallying rather than nominal bonds selling off. But it's a hard argument to be bullish on the big two asset classes (However, I expect Wall Street to make that argument loudly).