Some thoughts on the CPI report

US CPI (Y/Y) May: 5.0% (est 4.7%; prev 4.2%)

US CPI Ex Food, Energy (Y/Y) May: 3.8% (est 3.5%; prev 3.0%)

US CPI (M/M) May: 0.6% (est 0.5%; prev 0.8%)

US CPI Ex Food, Energy (M/M) May: 0.7% (est 0.5%; prev 0.9%) 






As I'm WAY behind on getting out a standard report (i.e., here's what the report said and my initial thoughts), and I figure given the amount of media coverage everyone is pretty aware already that the reading was very high for a second month (but not quite as high as April), I thought I would instead do an analysis of the two different camps (transitory versus non-transitory).

Transitory - This is the camp that says that the price increases we've been seeing are short-term in nature and the result of 1) previous deflation that is being "corrected" (i.e., "base effects") (for example, we know that airfares were slashed a year ago, and those were up 24% y/y in this report y/y or gasoline prices which were up 56% (energy prices overall were 1.8% of the 5% y/y increase in CPI)), and/or 2) short term supply chain issues (look no further than used car prices which are suffering from the inability to get chips for new cars and which were up 30% y/y (although new vehicles were only up 3.3% something I still can't quite understand)).

The transitory group likes to look at median and/or trimmed mean inflation stats like we talked about on Thursday that cut out these outliers.  They say things like "Transportation services inflation represented 15 percent of core inflation this month even though it is only 6.6 pct of this index. The key drivers there were motor vehicle insurance (+16.9 percent inflation) and airfares (+24.1 pct). Both were significantly lower last year and are now rebounding.  Excluding these 2 categories, core inflation last month was 2.3 percent, very close to the last pre-pandemic print of 2.4 percent in February 2020."  

They also note that things like food inflation while higher are not particularly high in historical context.

And they like to note that most of the big y/y increases we've seen are not in things that would be considered "sticky" like shelter costs or wages (wages being the most sticky of all inflation (I tend to think shelter isn't quite so sticky because we just saw huge rent deflation post-Covid (and huge owner equivalent rent (OER) deflation post-GFC but try cutting somebody's salary)).


Non-Transitory - This camp (and yes, I know, even the 70's inflation was "transitory", work with me here) says that while yes, a lot of the inflation we're seeing now is unlikely to continue (airfares won't go up another 24% y/y most likely and used car prices almost certainly won't go up another 30%), they won't necessarily go down, and inflation will "roll" from these to other sectors.  In addition, they note that some measures of inflation which are more like huge ships (slower to move but when they get going harder to stop) have started to move higher such as OER and the granddaddy of "sticky" prices wages. Of course wages are not included in CPI so in terms of goods inflation they're only relevant to the extent they get passed through to consumers.

Here are just a few of the many, many tweets/charts on this.







As you an see from the above, there's a big focus on shelter costs moving higher, so I thought I would note one thing on that, which is that it doesn't seem like the home prices component of CPI, as opposed to other categories, does a great job reflecting house prices.  As a result we may not see the big increase in CPI that many seem to be expecting (although rents may help this as they are increasing as well).

And regardless, some are just not that concerned even if OER increases.


FWIW, I'm more in the transitory than the non-transitory camp, but it bears watching (particularly the wages), and it means that the CPI and PPI reports have gone from yawners to must watch TV.

If you're interested, here's the table of the major categories (there's a more granular one, but it's several pages long).



To see more content, including summaries of some of today's economic reports and my morning and nightly updates go to https://sethiassociates.blogspot.com


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