Inflation Has Been Stuck in High Gear for Six Months
Jan 12, 2024 1:15:10 GMT -5
Post by J.J.Gibbs on Jan 12, 2024 1:15:10 GMT -5
Inflation Has Been Stuck in High Gear for Six Months
JOHN CARNEY
11 Jan 2024
Inflation Rises for Second Straight Month
The case that the economy is headed for a “soft landing” received a sharp setback on Thursday with the release of data showing inflation accelerated at the end of last year.
The Department of Labor said that its primary measure of inflation, the consumer price index (CPI), showed prices rose 0.3 percent in December, a sharp uptick from November’s 0.1 percent and October’s flat reading. The 12-month reading rose to 3.4 percent from November’s 3.1 percent.
Wall Street had been bracing for an uptick but not one as large as the economy delivered. The consensus estimate was for a 0.2 percent increase for the month. The estimates for the annual increase ranged from three percent to 3.3 percent, which means the actual result was higher than any of the estimates in the Econoday survey.
This is the second consecutive month of rising monthly inflation numbers, at best suggesting that the glide path toward lower inflation that many on Wall Street have been expecting has a lot more bumps on it than anticipated. While it is easy to dismiss one month’s rise as nothing more than volatility, the second months’ consecutive acceleration demands attention.
The chart of 12-month inflation tells an important story. It shows that inflation hit its nadir in June and has since been moving sideways, with deviations to the upside. The disinflationary forces—mostly repaired supply chains, a return of women to the workforce, and smaller excess savings from stimulus payments—that brought inflation down for 12 or so months appear to have run their course.
While some of those still wedded to the narrative of disinflation have described this as the downturn in inflation “stabilizing,” the truth is that—in the words of Ben Hunt of Epsilon Theory—“disinflation stopped cold turkey six months ago.”
The six-month annualized CPI also picked up, as Daryl Jones, HedgeEye’s Director of Research, pointed out on X.
Our favorite measures of underlying inflation tell the same story. Both median CPI and 16 percent trimmed mean CPI were unchanged in November, and both are higher than they were in October. If we annualize the December figure, 16 percent trimmed mean inflation is running at 4.3 percent and has been rising for two months. The one-month annualized figure for median CPI dipped in December but remains at the extraordinarily high pace of 4.8 percent.
The Atlanta Fed tracks what it calls “sticky inflation,” the inflation in goods and services included in the CPI basket that change prices infrequently. These increased 4.6 percent on an annualized basis in December, following a 3.6 percent increase in November. On a year-over-year basis, the series is up 4.6 percent.
In short, the inflation data suggests we are headed for “no landing” rather than a soft landing. Inflation appears to have become stuck at a level well above the Fed’s target.
Gimme Shelter
Although the soft-landers and immaculate disinflationists have been predicting for a year that shelter prices will stop contributing to inflation real soon, shelter prices continued to rise in December. Indeed, they contributed over half of the monthly rise in overall CPI in December, with rents rising 0.4 percent and owners equivalent of rent rising 0.5 percent.
The large contribution to shelter has led some inflation watchers to attempt to exclude shelter from inflation figures. This is probably a mistake. Shelter inflation is not necessarily pushing up overall inflation just because it is a large contributor to inflation. What’s really happening is that higher rent costs are soaking up inflationary pressures that would otherwise push up other prices. So, looking at CPI ex-shelter does not tell us anything about underlying inflation.
Some analysts who look at CPI ex-shelter may be confused by the fact that Jerome Powell has frequently said he looks at a measure of the services side of inflation that excludes housing services. This, however, is not to say that housing inflation does not matter or that it can be safely carved off from overall inflation. It’s because the Fed is very focused on the danger of inflationary pressures in the services sector, which is largely pressure coming from increased wages. Taking housing out of that calculation helps narrow the focus to the contribution of rising wages.
On Thursday, there were many once again arguing that the shelter contribution to inflation was only because the way the Department of Labor calculates it means it enters the figures with a lag. The trouble with trying to read inflation as lower now by looking past the lag is that it requires reading inflation as higher earlier. Shelter prices did increase, and if you try to take them out of the current figures, you need to add them in the past figures.
Services Still Running Hot
The pace of services inflation did cool—a little. Services excluding energy services rose by 0.4 percent month-over-month, down from 0.5 percent. Unrounded, however, the progress was less impressive. Monthly core services prices rose 0.47 percent in November and 0.44 percent in December, just a three basis point move that looks like a 10-basis point decline after rounding.
It’s unlikely that services disinflation will continue if the labor market continues to run hot. We learned on Thursday that jobless claims did not increase at all last week from the week before, holding at 202,000. Without increased slack in the labor market, wages increases will likely accelerate and services sector inflation will follow.
The market remains convinced that the Fed is still on course for a March rate cut. It may be right about that. But a rate cut in March despite data showing stabilizing or rising inflation is likely to be extremely politically provocative. Is that a risk the Fed is willing to take?
link
JOHN CARNEY
11 Jan 2024
Inflation Rises for Second Straight Month
The case that the economy is headed for a “soft landing” received a sharp setback on Thursday with the release of data showing inflation accelerated at the end of last year.
The Department of Labor said that its primary measure of inflation, the consumer price index (CPI), showed prices rose 0.3 percent in December, a sharp uptick from November’s 0.1 percent and October’s flat reading. The 12-month reading rose to 3.4 percent from November’s 3.1 percent.
Wall Street had been bracing for an uptick but not one as large as the economy delivered. The consensus estimate was for a 0.2 percent increase for the month. The estimates for the annual increase ranged from three percent to 3.3 percent, which means the actual result was higher than any of the estimates in the Econoday survey.
This is the second consecutive month of rising monthly inflation numbers, at best suggesting that the glide path toward lower inflation that many on Wall Street have been expecting has a lot more bumps on it than anticipated. While it is easy to dismiss one month’s rise as nothing more than volatility, the second months’ consecutive acceleration demands attention.
The chart of 12-month inflation tells an important story. It shows that inflation hit its nadir in June and has since been moving sideways, with deviations to the upside. The disinflationary forces—mostly repaired supply chains, a return of women to the workforce, and smaller excess savings from stimulus payments—that brought inflation down for 12 or so months appear to have run their course.
While some of those still wedded to the narrative of disinflation have described this as the downturn in inflation “stabilizing,” the truth is that—in the words of Ben Hunt of Epsilon Theory—“disinflation stopped cold turkey six months ago.”
The six-month annualized CPI also picked up, as Daryl Jones, HedgeEye’s Director of Research, pointed out on X.
Our favorite measures of underlying inflation tell the same story. Both median CPI and 16 percent trimmed mean CPI were unchanged in November, and both are higher than they were in October. If we annualize the December figure, 16 percent trimmed mean inflation is running at 4.3 percent and has been rising for two months. The one-month annualized figure for median CPI dipped in December but remains at the extraordinarily high pace of 4.8 percent.
The Atlanta Fed tracks what it calls “sticky inflation,” the inflation in goods and services included in the CPI basket that change prices infrequently. These increased 4.6 percent on an annualized basis in December, following a 3.6 percent increase in November. On a year-over-year basis, the series is up 4.6 percent.
In short, the inflation data suggests we are headed for “no landing” rather than a soft landing. Inflation appears to have become stuck at a level well above the Fed’s target.
Gimme Shelter
Although the soft-landers and immaculate disinflationists have been predicting for a year that shelter prices will stop contributing to inflation real soon, shelter prices continued to rise in December. Indeed, they contributed over half of the monthly rise in overall CPI in December, with rents rising 0.4 percent and owners equivalent of rent rising 0.5 percent.
The large contribution to shelter has led some inflation watchers to attempt to exclude shelter from inflation figures. This is probably a mistake. Shelter inflation is not necessarily pushing up overall inflation just because it is a large contributor to inflation. What’s really happening is that higher rent costs are soaking up inflationary pressures that would otherwise push up other prices. So, looking at CPI ex-shelter does not tell us anything about underlying inflation.
Some analysts who look at CPI ex-shelter may be confused by the fact that Jerome Powell has frequently said he looks at a measure of the services side of inflation that excludes housing services. This, however, is not to say that housing inflation does not matter or that it can be safely carved off from overall inflation. It’s because the Fed is very focused on the danger of inflationary pressures in the services sector, which is largely pressure coming from increased wages. Taking housing out of that calculation helps narrow the focus to the contribution of rising wages.
On Thursday, there were many once again arguing that the shelter contribution to inflation was only because the way the Department of Labor calculates it means it enters the figures with a lag. The trouble with trying to read inflation as lower now by looking past the lag is that it requires reading inflation as higher earlier. Shelter prices did increase, and if you try to take them out of the current figures, you need to add them in the past figures.
Services Still Running Hot
The pace of services inflation did cool—a little. Services excluding energy services rose by 0.4 percent month-over-month, down from 0.5 percent. Unrounded, however, the progress was less impressive. Monthly core services prices rose 0.47 percent in November and 0.44 percent in December, just a three basis point move that looks like a 10-basis point decline after rounding.
It’s unlikely that services disinflation will continue if the labor market continues to run hot. We learned on Thursday that jobless claims did not increase at all last week from the week before, holding at 202,000. Without increased slack in the labor market, wages increases will likely accelerate and services sector inflation will follow.
The market remains convinced that the Fed is still on course for a March rate cut. It may be right about that. But a rate cut in March despite data showing stabilizing or rising inflation is likely to be extremely politically provocative. Is that a risk the Fed is willing to take?
link
