Here is a collection of my post-CPI tweets and some additional
Looks like +0.09% on Core CPI - incredibly, rounded UP. Lots
of little drags - vehicles, computers, utilities. Some very
YOY core down to 2.10%, no rounding needed. This is a BIG
downside surprise in CPI, which was biased to a round-up.
Energy subtracted from headline - last time for that for a
Electricity, which is 3% of overall consumption, fell 1.3%
on the month. That's a lagged response to natural gas' decline,
CPI number gives a bit more latitude for the Fed's QE3. Not
that 2.1% vs 2.2% is great, but will make contours of inflation
Primary rents +0.3%, OER +0.2%… together [are] 30% of
overall basket, and the stickier part.
Accelerating CPI groups: Medical Care, Other (12.2% of
basket); decelerating: Food/Beverage, Housing, Apparel,
Transportation, Education/Comm (81.9%!)
A fair amount of CPI deceleration was base effect of last
July falling out. Pressure is on the inflation bulls (me
VERY interesting… Cleveland Fed's Median CPI +0.2%, YOY
stayed at 2.3%. This is the most that Median has been above
Core since 2009.
I don't think my view of the likely trajectory of core CPI has
changed much. Housing remains buoyant, and certainly there are no
signs that housing inflation is going to decelerate going forward,
since surveys of primary rents are rising comparatively briskly. If
housing isn't going to slow down, then it's hard to get a
meaningful deceleration of core CPI going.
The base effects at work here shouldn't be underestimated.
Apparel prices rose, and rose on a seasonally adjusted basis, but
year-on-year apparel inflation declined. As the chart below shows,
however, this doesn't mean that apparel prices are falling. And, in
fact, the character of apparel price inflation still appears to
have undergone a tectonic shift.
(click to enlarge)
August 2011 core CPI, which will fall out of the year-on-year
calculation next month, was +0.24% and will create a decent chance
of another slip lower in core CPI. But the four months following
that were all +0.17% or less, which means that the local low for
year-on-year core CPI is almost surely in August. If traders
perceive a bigger swing in the CPI than is actually happening, it
will represent an opportunity to get long breakevens or inflation
swaps at lower-than-current levels.
Outside of core inflation, there are relevant trends building in
food and energy. Although retail gasoline prices are only up about
$0.12/gallon from a year ago, they're also up $0.40 in the last six
weeks at a time when most observers were expecting continued low
prices. Some of this is Middle East tension, but a fair amount of
it is related to domestic refinery issues and, of course, the
increase in money. Energy prices will continue to ebb and flow, but
gasoline prices within $0.40/gallon of an all-time high at a time
when the global economy is sputtering at best should not be
discounted. "Slack demand" isn't working. Since 2004, retail
gasoline prices are up at around a 9% per annum pace (and much
faster if you measure from the 2008 lows, which erased 2004-2008
gains), while M2 is up at a 6% per annum pace over the same period.
This just in: More money in the system means that money depreciates
relative to hard commodities.
While the current cycle in grain prices, to be followed soon by
livestock prices, is likely amplified by the domestic drought and
other food crop problems worldwide, I think it is unlikely that we
will see prices back to the lows of a few years ago. As I pointed
grain prices are not particularly high at all, and arguably are low
considering the current crop condition.
These are not in core inflation, and there is nothing that Fed
officials can do to restrain these prices separately from their
efforts to restrain all prices. Accordingly, it is still reasonable
for policymakers to focus on the more stable core CPI and median
CPI in setting policy. It doesn't mean they don't care about food
prices going up. It doesn't mean they want everyone to live without
energy. It is just that they need to focus on a less noisy
At the same time, though, a rise in food and energy prices
narrows the window during which the Federal Reserve can point
optimistically at headline inflation being below core inflation. If
the Fed is going to ease, I think it is going to be in September or
it's not going to happen. And if that's going to happen, then I
think we'll hear Chairman Bernanke speak generously about the
capabilities of monetary policy at the Jackson Hole conference,
which begins August 30.
Astonishingly, despite weak inflation data and a very weak
Empire Manufacturing report (consensus was +7.00 and the print was
-5.85), bonds sold off anyway with the 10-year yield up 5bps at
2:40pm on Wednesday (when I wrote this) and real yield actually up
more (10y TIPS +7bps to -0.46%). Equities traded listlessly, and
commodities rallied. So, even though I was
wrong Tuesday about what was going to happen with core CPI, I was
wrong about the market reaction. In this case, two wrongs make a
right, although I don't recommend pursuing this method of
prognostication on a regular basis.
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