Latest Inflation Numbers and Discussion

[yhoomajor]

The consumer price index rose 0.1% in March and 5% from a year ago.
Excluding food and energy, the core CPI accelerated 0.4% and 5.6%.

Everything else is just trying to look at numbers from a different angle.
https://www.cnbc.com/2023/04/12/cpi-march-2023-.html

btw - both food and energy have started to go back up again here in Arizona.

 

[MichaelB]

The Fed also monitors inflation expectations, and earlier this week the NY Fed reported a slight increase in 1 and 3 year expectations https://www.newyorkfed.org/newsevents/news/research/2023/20230410 The 3 year rate is still within historical averages, but the 1 year rate is still high and this increase suggests an increase in rates is still possible.

Median inflation expectations increased by 0.5 percentage point at the one-year-ahead horizon to 4.7%, marking the first increase in the series since October 2022. Median inflation expectations increased by 0.1 percentage point at the three-year-ahead horizon to 2.8%, but decreased by 0.1 percentage point at the five-year-ahead horizon to 2.5%. The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) increased at all three horizons.

 

[Montecfo]

My guess is they will do the 25bp in May. The Fed is invested in that as it is their "plan".

But the narrative when banks begin reporting earnings could change things. They do not want to trigger another bank failure. That is probably job one. Or should be.

 

[Gumby]

The Fed also monitors inflation expectations, and earlier this week the NY Fed reported a slight increase in 1 and 3 year expectations https://www.newyorkfed.org/newsevents/news/research/2023/20230410 The 3 year rate is still within historical averages, but the 1 year rate is still high and this increase suggests an increase in rates is still possible.

How closely do the inflation expectations of the people surveyed match the actual subsequent inflation rates? Do they ever retrospectively compare them?

 

[JoeWras]

The index is still working out two important components that lag.

1) Shelter. Still high, but now should start moderating as the lag is starting to run out (takes about 18 months). Since it is 1/3 of the index, this will be good for the overall number no matter what. The bad news is that real estate hasn't dropped in most places, and is actually rising again, so it doubtfully will ever go negative.

2) Medical insurance. The way medical is measured is confusing and quirky. It way overshot a year ago, and now is running off about a year of negative month to month numbers. This will run out this summer and will likely go positive (inflationary) again.

 

[Gumby]

The best news is that bacon is 5.5% lower than last year.

https://www.cnbc.com/2023/04/12/heres-the-inflation-breakdown-for-march-2023-in-one-chart.html

 

[MichaelB]

How closely do the inflation expectations of the people surveyed match the actual subsequent inflation rates? Do they ever retrospectively compare them?

The University of Michigan Inflation Expectations Index is about as accurate as any of the regional Fed surveys, and it seems to track well with actual inflation, though not so well at the extremes, which is where we have been for the past year. It also turned up recently, so I would guess the Fed will be concerned the recent improvements will not hold.

It helps to keep in mind these are surveys, not hard data. The monthly CPI numbers are also a combination of hard data and methodology. In both cases the trends they highlight are more important than the month to month changes.

 

[Koolau]

^^^^^^^^

I don't know about all this, but we're paying 50% more this year than last year for air tickets to the mainland.

Oh, and gas is still almost $5 here.

Yeah, that's anecdotal, but it's real if you're paying it. Apparently there's enough "good news" that can be touted by those who wish to do so. Enjoy it while it lasts I guess 'cause YMMV.

 

[Ultrac]

The University of Michigan Inflation Expectations Index is about as accurate as any of the regional Fed surveys, and it seems to track well with actual inflation, though not so well at the extremes, which is where we have been for the past year. It also turned up recently, so I would guess the Fed will be concerned the recent improvements will not hold.

It helps to keep in mind these are surveys, not hard data. The monthly CPI numbers are also a combination of hard data and methodology. In both cases the trends they highlight are more important than the month to month changes.

What do you mean when you say it "seems to track well with actual inflation"?

I went to the FRED site and downloaded the CPI (monthly data, seasonally adjusted, annual rate) and Michigan Inflation Expectations data to Excel.

As the Michigan data is supposed to be an estimate of inflation in 12 months' time, I inserted 12 rows so as to line up the expectations with the actual and plotted it. It does not look like there is any predictive power in the Michigan data.

The Excel correlation was .58 which is moderate. But as inflation was stable for most of the period that doesn't mean much.

 

[Gumby]

Thanks for doing that. I find it interesting.

 

[Ultrac]

The actual one month seasonally adjusted percent change in inflation in March was 0.05304%, not 0.1% as reported (Source FRED CPI data).

Looking at the FRED CPI (seasonally adjusted) data (see chart) there was a dramatic fall in inflation that occurred in July 2022.

In the 9 months since then, inflation has risen at a rate of 3.2% per annum (9 months of data extrapolated to 12 months). In the 9 months prior to July 2022, it rose by 10.1% (9 months of data extrapolated to 12 months).

Looking at the attached chart, it seems to me that reported annual inflation is highly likely to fall in May and June this year (reported June, July respectively) as the May and June monthly numbers in 2022 were so high.

The April number (reported in May) will likely fall a little as May 2022 was much lower than the surrounding months.

I believe that the trend is clear; the reported annual inflation rate is highly likely to fall over the next three months.

 

[MichaelB]

What do you mean when you say it "seems to track well with actual inflation"?

I went to the FRED site and downloaded the CPI (monthly data, seasonally adjusted, annual rate) and Michigan Inflation Expectations data to Excel.

As the Michigan data is supposed to be an estimate of inflation in 12 months' time, I inserted 12 rows so as to line up the expectations with the actual and plotted it. It does not look like there is any predictive power in the Michigan data.

The Excel correlation was .58 which is moderate. But as inflation was stable for most of the period that doesn't mean much.

Yes, and like I wrote, at the extremes the measurement is less meaningful. There are multiple efforts to track inflation expectations.

Once again, this is not hard data, it is survey based. My point was that surveys for inflation expectations have changed, after multiple months of decline they turned up slightly. We don’t know if this change in inflection is significant or will be sustained.

 

[copyright1997reloaded]

People think back to the 1970's thinking that inflation started slow and increased as the decade went on. This is not true. Instead, there was a first wave from 1972 to 1974 which was the result of the opec oil embargo/rising energy costs, rising food costs and the removal of wage-price controls. The result was >10% inflation.

Then there was moderation, with the rate of inflation falling to 4.8% in 1976.

Then the 2nd wave hit, starting in 1977 and peaking at close to 15% in the first half of 1980.

Enjoy the falling inflation rate...but be mindful that treasuries at 5% won't be enough if a couple/few years from now we get another (bigger) surge in inflation.

In my opinion (SGOTI), we should be watching deals being made to trade in non-US $ very carefully.

 

[Gumby]

The actual one month seasonally adjusted percent change in inflation in March was 0.05304%, not 0.1% as reported (Source FRED CPI data).....

As long as I have been reading them, the BLS releases have always rounded to the nearest tenth of a percent (0.1%) on the monthlies .

 

[JoeWras]

^^^^^^^^

I don't know about all this, but we're paying 50% more this year than last year for air tickets to the mainland.

Oh, and gas is still almost $5 here.

Yeah, that's anecdotal, but it's real if you're paying it. Apparently there's enough "good news" that can be touted by those who wish to do so. Enjoy it while it lasts I guess 'cause YMMV.

I think what you are feeling, Koolau, is core inflation. When one looks at the BLS report, one can see that the overall inflation spiked hard a year ago, then dropped quite nicely Q4. That's YoY. Month to month, it was more volatile. Overall, in the second half it extrapolated to around 2% to 3%, depending on the month. Yet core chugged along at 3% to 6%, extrapolated.

We are feeling this core which is now hovering around 4% to 5%. That's noticeable.

Page 17 of the BLS pdf report also creates other core categories. Like for instance, "All items less food, shelter, energy and cars". Yoy: 5.1%, MoM: 0.3% (extrapolate to say 3.6%).

If the Fed is looking at 2%, there's still work to do. Now since the index used for iBonds and TIPS is the overall rate, that's a different matter....

 

[Freedom56]

People, especially savers, have to put inflation into perspective. For the last decade, savers adapted to an interest rate environment where they earned next to nothing for their deposits and CDs. Now they are earning as much as 45-60 times more in interest income than in 2021. The financial media have you believe that everyone is suffering from inflation which is false. The two thirds of the country that live paycheck to paycheck regardless of their income levels are impacted the most. However a significant portion of the the remaining third are doing better than in a long time. So the increase in interest income, more than compensates for the increase in the price of eggs and other food items. I have spoken to many neighbors who are retired and happy that they are once again earning income from their cash investments. Not everyone is a Boglehead with a 60/40 portfolio. Many have never invested in stocks and never intend to.

 

[Montecfo]

If the Fed is looking at 2%, there's still work to do.

Slightly nuanced view: There is work that has been done (475BP of rate increases) and credit tightening (bank credit in the wake of the bank failures) that is not yet fully reflected in the rates and will not be for several months.. The cake needs to bake a while before the work can be assessed.

And as an aside the YOY numbers are not really valuable now given that the bulk of the price increases occurred prior to last July i.e, 9+ months ago and will continue to roll off unless something changes dramatically.

 

[GenXguy]

People, especially savers, have to put inflation into perspective. For the last decade, savers adapted to an interest rate environment where they earned next to nothing for their deposits and CDs. Now they are earning as much as 45-60 times more in interest income than in 2021. The financial media have you believe that everyone is suffering from inflation which is false. The two thirds of the country that live paycheck to paycheck regardless of their income levels are impacted the most. However a significant portion of the the remaining third are doing better than in a long time. So the increase in interest income, more than compensates for the increase in the price of eggs and other food items. I have spoken to many neighbors who are retired and happy that they are once again earning income from their cash investments. Not everyone is a Boglehead with a 60/40 portfolio. Many have never invested in stocks and never intend to.

Inflation has been devastating to my savings/stach. Devalued significantly, and the interest I'm earning after taxes is well below continuing inflation and the actual purchasing power I've lost in my investments. I'm having to delay retirement two to three years strictly due to massive inflation over the last few years, which for me is actually even considerably higher than the government figures, which have already been a few times as high as the fed target rate.

For years, my fixed interest fund through my work retirement account was earning above the inflation rate, but over the last couple years, it was losing significantly to inflation, same thing with the regular low interest CDs I had through much of this time. Then all my existing brokerage investments are down significantly from their peak in nominal dollars, while inflation has devalued them even more beyond that as high inflation continued to drive up prices, so a double whammy. So this has been a massively negative thing for me and many others despite being nowhere close to "paycheck to paycheck". And still today, inflation exceeds my fixed interest fund through my retirement account and my more recent ~5% CDs after accounting for income taxes on the interest, plus the mutual funds are still well below their peaks. There's not going to be any significant recovery from the value lost across the board, and I'm still losing out as inflation remains so high.

We shouldn't downplay it. Inflation is hurting (or costing) a lot of people, and some don't even know to what extent it has cost them because they don't get that their savings/investments have been devalued over the last few years rather than just realizing everything costs them a lot more to live

This whole pandemic and inflation time frame has really upset my retirement apple cart and cost me a fortune in true purchasing power across a diversified portfolio. No, it's not just those living paycheck to paycheck that are having to pay the price due to skyrocketing inflation. In fact, I don't know of anyone that says they are doing better in the last few years due to inflation.

 

[Freedom56]

This whole pandemic and inflation time frame has really upset my retirement apple cart and cost me a fortune in true purchasing power across a diversified portfolio. No, it's not just those living paycheck to paycheck that are having to pay the price due to skyrocketing inflation. In fact, I don't know of anyone that says they are doing better in the last few years due to inflation.

Those of us that are 100% in fixed income (not bond funds) are doing much better. Consider that every $1M invested today earns about $50K to $54K with risk free treasury notes or CDs versus about $5K to $10K in 2021. That excess income more than compensates for inflation. Keep in mind that with the national debt forecasted to reach $53T by 2033, we are not likely to see zero interest rates anytime soon. The risk of a debt downgrade is a real possibility unless the budget deficit is brought under control. This could spike rates up even higher.

 

[Chuckanut]

Keep in mind that with the national debt forecasted to reach $53T by 2033, we are not likely to see zero interest rates anytime soon. The risk of a debt downgrade is a real possibility unless the budget deficit is brought under control. This could spike rates up even higher.

+1

A column in today’s WSJ says that the first six months of the 2023 fiscal year have seen a 1.1 trillion dollar deficit. That’s $3000 for every citizen in the USA in only 6 months.

IMO, there’s plenty of inflation fertilizer being spread around the economy.

 

[Freedom56]

+1

A column in today’s WSJ says that the first six months of the 2023 fiscal year have seen a 1.1 trillion dollar deficit. That’s $3000 for every citizen in the USA in only 6 months.

IMO, there’s plenty of inflation fertilizer being spread around the economy.

If tax receipts for April 2023 come in below expectations, it will put more pressure on long term rates. The Fed funds rate can impact the short end of the yield curve, but the intermediate to long end is dictated by the market and at some point, investors will demand more yield for longer dated treasury notes and bonds if the deficit spirals out of control. This happened recently in the UK and will happen here also.

 

[Running_Man]

Average apartment is up around $250 from $1100 in two years year. That is 22% CPI has it at 11% over the last 2 years since they determine it by asking Aunt Louise how much she thinks her house would rent for, not actual rents.

Rents in my town have gone from $950 for a two bedroom in 2021 to $1500 today. If you are a renter and living on a 18-25 per hour job inflation is really affecting you. If
you are a millionaire retired with a bunch of CD's and a paid off house or one with a 3% mortgage, you like FED President Mary Daly, think everyone complaining about inflation should just relax and that many many Americans have enough money to not worry about inflation. For the poor that she saw as effected she said:
"You may not be able to go to the vacation you want. You may end up instead camping or doing a stay-cation," Daly said. "Or what you used to eat out to do, you eat in your hotel because you can't really afford getting there and then going out to dinner once you're at the hotel. And I see all of that."

This is a bad take and inflation with a 2 Trillion dollar deficit running, is going to be interesting. The idea you could spend 2 trillion without any productive work backing it and counting on people holding treasuries to offset the increase in currency is a roulette game in the long run. The idea that 5 percent inflation is controlling inflation when the numbers are massaged to present the best possible case is worrisome.

 

[Montecfo]

Higher rates drive equity values lower. Lower equity values reduce taxable gains. Reduced taxable gains equal reduced tax receipts.

The recession, which Fed staff now says is likely, will also reduce incomes and tax receipts and no doubt be met with choruses of voices demanding extended unemployment, enhanced food stamps, eviction moratoria and other largesse from the pandemic era. Deficit hiking.

And of course calls to cut interest rates. Which will be heeded.

And US yields will remain attractive as they are higher than other sovereigns.

 

[Montecfo]

Average apartment is up around $250 from $1100 in two years year. That is 22% CPI has it at 11% over the last 2 years since they determine it by asking Aunt Louise how much she thinks her house would rent for, not actual rents.

Rents in my town have gone from $950 for a two bedroom in 2021 to $1500 today. If you are a renter and living on a 18-25 per hour job inflation is really affecting you. If
you are a millionaire retired with a bunch of CD's and a paid off house or one with a 3% mortgage, you like FED President Mary Daly, think everyone complaining about inflation should just relax and that many many Americans have enough money to not worry about inflation. For the poor that she saw as effected she said:
"You may not be able to go to the vacation you want. You may end up instead camping or doing a stay-cation," Daly said. "Or what you used to eat out to do, you eat in your hotel because you can't really afford getting there and then going out to dinner once you're at the hotel. And I see all of that."

This is a bad take and inflation with a 2 Trillion dollar deficit running, is going to be interesting. The idea you could spend 2 trillion without any productive work backing it and counting on people holding treasuries to offset the increase in currency is a roulette game in the long run. The idea that 5 percent inflation is controlling inflation when the numbers are massaged to present the best possible case is worrisome.

From your chart it looks like pricing has fallen back to about April 2022 levels.

Real estate is local but rents have been falling recently as the posted chart shows.

 

[Gumby]

In the news this morning

U.S. producer price index unexpectedly falls in March
The producer price index, a gauge of wholesale inflation, fell 0.5% month over month in March — another sign that U.S. inflation may be cooling. Economists polled by Dow Jones expected PPI to remain unchanged from February.

Core PPI, which strips out food and energy prices, fell 0.1%, while economists had forecast a 0.2% increase.

https://www.cnbc.com/2023/04/12/stock-market-today-live-updates.html