CPI Breakdown: Have We Really Seen The Highs In Inflation?

09/13/2022

7 minutes read

2022.09.13 16:36

Honestly, I came into today thinking this was a less-important report than we had seen in a while. I thought the real question was whether the report would change the Fed’s decision at the next meeting, not this month’s meeting. As it turns out, the answer to that is probably yes (but we have another CPI before that meeting). But the more important question that has resurfaced is, “have we really seen the highs in inflation yet?”

That seems crazy to ask if you believed that this was all a one-off caused by clogged ports and “supply constraints.” It hasn’t been about that in a long time—and really, never was, since those clogged ports were caused by artificially-induced demand, but if you’re still in that camp, you’re utterly shocked here.

It still seems wild to ask from my perspective. My view has been that if the money supply has risen 42% since the beginning of the COVID crisis, and prices are only up 15%, then prices have a lot more to do before they are in line with money growth. But I thought that would happen more gradually, with a 5%ish inflation that stuck around longer than people expected.

That’s less clear now. If core services ex-shelter is really taking the baton from core goods, that’s really bad news because core services ex-shelter is where wage pressure really lives.

We don’t import services; we pay people to provide them. If you want a wage-price spiral, look in core services ex-shelter to see if it’s happening. Honestly? That part of CPI was already looking a little spritely in recent reports. But it looks to have really broken out now. That’s very disturbing. It adds momentum to the CPI.

Ultimately, it’s still all about whether there’s too much money chasing too few goods. But if a wage-price spiral gets started, then that will manifest in higher money velocity over time so that even slower money growth will be associated with rising prices. That’s a bad thing.

By the way, it isn’t anything the Fed can break with . Decreasing the money supply has never really been the Fed’s focus, but that’s the lever they needed to be moving. And now? Doing that now would have less of an effect if we have momentum in pricing again.

It’s still the right move, but the FOMC has made a terrible mess of this and is going to wear it.

That being said, there is another CPI due before the next Fed meeting. My thinking had been that the Fed figured they were close to done (otherwise, Powell beating his chest with the manly-but-vacuous ‘until the job is done thing which, by the way, is going to become a meme just like ‘transitory—just didn’t make any sense) so that if this number was as-expected, they would be considering just how soon to pause their hikes, maybe as soon as November.

Now, that’s sort of out the window.

The market reaction makes eminent sense, given this backdrop. But you didn’t need me to tell you that. Before this was even printed, the fact that expected real equity returns were basically below long-term TIPS returns meant that being in equities didn’t make a lot of sense. It makes less now, at least, at this level. We may be about to see a different level.

The real question is: will we recede on core/median to 2.5%, or 5%? I think it’s closer to the latter than the former, and not until next year, but there is no way that ONE NUMBER could really answer that.

So I care about sticky, I care about whether we are seeing a new uptrend in core services, I care about rents. I don’t care so much about lodging away from home.

Now, that doesn’t mean we should ignore this number. Indeed, to me it seems that expectations for this number have swung really to the low side. Both in economist land and in trading land.

M/M, Y/Y, and prior Y/Y for 8 major subgroups:

Food and beverages still rising. 0.77% m/m and 10.9% y/y! All other subindices contributed. “Other” was +0.73% m/m so that will be interesting. Medical Care +0.68% and that is also going to be interesting/disturbing.

Core Services And Core Goods

Core goods actually went UP y/y, just a tiny bit, 7.06%. And core services continuing to rise, 6.07%. Convergence at 6.5% is not what people were hoping for.

Primary Rents: 6.74% y/y OER: 6.29% y/y.

OER And Primary Rents

Further: Primary Rents 0.74% M/M, 6.74% Y/Y (6.31% last) OER 0.71% M/M, 6.29% Y/Y (5.83% last) Lodging Away From Home 0.1% M/M, 4% Y/Y (1% last)

Primary rents 0.74% m/m. OER 0.71% m/m. That’s the big ouch. I read this morning on Bloomberg I think that ‘rents are near a peak.’ Uh, sure. Lodging Away from Home was positive…didn’t retrace last month’s drop, but didn’t repeat it either.

I mean, this is a little scary, right? No sign of a peak yet.

Some COVID categories: Airfares -4.62% M/M (-7.83% Last) Lodging Away from Home 0.08% M/M (-2.74% Last) Used Cars/Trucks -0.1% M/M (-0.41% Last) New Cars/Trucks 0.84% M/M (0.62% Last)

Piece 1: Food & Energy: 15.7% y/y:

Food And Energy CPI

Only surprise here is that it isn’t retracing nearly as much as people expected. You know why? FOOD. When was the last time we really worried about food prices driving the CPI?

Piece 2: Core Commodities: 7.06% y/y:

Core Commodities

Piece 3: Core Services less Rent of Shelter: 5.75% y/y:

Core Services Less Rent Of Shelter

This is even more concerning than the shelter numbers, in my mind. I’ll dig deeper into medical care, but this has been a well-behaved part of CPI for a long time. BUT IT’S WAGES. That’s what matters in this group. This is where your wage/price spiral would show up.

Piece 4: Rent of Shelter: 6.31% y/y

Rent Of Shelter

So 0.12% on headline (SA), 0.57% on core. Not exactly what the market was expecting.

Yeah, so I guess last month were one-offs. But those of us “in the know” knew that, right?

Last 12 core CPI figures:

Core CPI MoM, Last 12 Months

Some ‘COVID’ Categories: Airfares -4.62% M/M (-7.83% Last) Lodging Away from Home 0.08% M/M (-2.74% Last) Used Cars/Trucks -0.1% M/M (-0.41% Last) New Cars/Trucks 0.84% M/M (0.62% Last).

Airfares keep sliding, but again a lot of this is jet fuel. As has been pointed out elsewhere, if you quality-adjust airfares then inflation is still soaring. Used cars was a small drag, as expected. But look at new cars! The rise in new cars is probably the reason that core goods advanced. 0.8% m/m in new cars is impressive.

I need to run some of my slower charts now but looking at markets the only quirky thing – I understand the market but it’s weird – is that energy prices are down. The theory is that more Fed hikes slow the economy more, but if you’re connecting growth and inflation then.

Energy is confusing nominal and real prices again, too. Maybe it’s a dollar thing. Dollar is definitely stronger as Fed arc is perceived higher now.

Core ex-shelter rose to 6.36% from 6.04%. Back to the level of May. Hard to tell on this chart. This will probably continue to decline, but this is the really surprising part of the report. Going to get to the smaller stuff in a bit and see what’s up.

Core CPI Ex-Shelter

Car and truck rental was -0.5% m/m (NSA)…it was a big drop last month as well. Interesting, and not sure what that means.

No other interesting declines. On the upside was new cars at 4% of the basket, which was 3-4bps of the surprise roughly. Not enough to explain it all!

Lots of other motor vehicle stuff. Maintenance and repair, insurance, parts, and equipment…all rose at greater than a 10% annualized pace.

Also, south urban OER rose 0.9% m/m or so. So rents and prices are rising in the south but not falling in the north. Some of that is migration. The median category was rent of primary residence, which, as noted, was large.

With the median as primary rents, my 0.74% m/m median guess is probably pretty solid. That takes the y/y median to 6.7%, I believe.

Medical care, prescription drugs +0.36% m/m (NSA). Dental services at +1.31%. Hospital Services +0.78%. YES. I’ve been wondering where this was for a long time. Still only up to 4% y/y, but it’s way overdue.

Similarly, prescription drugs…3.2% y/y, the highest since 2018. I wonder if the determination that Medicare will ‘negotiate’ more drug prices is leading manufacturers to hike prices in advance?

OK…college tuition and fees, +1.3% m/m. That’s not unusual for the NSA to jump in this month; tuition jumps once a year basically. But that means the y/y change is going to move higher as the SA adjustment is smoothed in. Now it’s at 2.79% up from 2.35%.

Colleges have cost pressures too. And wage exposure. Over the last few years tuition inflation has been low because endowments and government support has been huge. This is all fading though, and costs are still climbing. Look out above.

Finally, in “Other”. We have cosmetics, perfume, bath, nail preparations (yes that’s a category) +2.3% m/m. Financial Services ex-Inflation Guy +0.87% m/m. Haircuts and other personal care services +0.66%. Notice something there? A lot of wages.

On the plus side, “Funeral expenses” was -0.5% m/m. So we got that going for us. Cigarettes +1.1% m/m.

OK last chart. The red line here isn’t really going off the chart (yet) – it’s median at 6.99% (est). The EI Inflation Diffusion Index – no surprise – is not coming off the boil. Inflation remains high, but also broad. Some categories are slowing, but some are accelerating!

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