Another edition of our new series: Blog Spotlight.
We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
around 7pm.
Next up in our Blogger Spotlight: Ticker Sense
Justin Walters and Paul Hickey work at Birinyi Associates, a highly respected research firm specializing in quantitative analysis. Walters and Hickey co-founded and developed Ticker Sense in the fall of 2005. Prior to working at Birinyi, Paul Hickey traded emerging market structured products for Salomon Smith Barney. Justin Walters began at Birinyi Associates in 2003 after graduating from Yale University with a degree in economics. Along with their work on Ticker Sense, they offer in-depth research through subscription services at Birinyi.com.
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Today’s focus commentary looks at: What’s Driving The CPI
It’s hard to believe that inflation can be a worry when the PPI shows a 1.4% decline for the month of September, but that’s exactly what happened on Tuesday as traders worried about the much stronger than expected rise in the core reading. And since the market was quick to dismiss the headline number while oil was rising, it’s only fair that we ignore it while oil is on the way down.
Were investor fears over the stronger than expected core reading misplaced, however? From the looks of this morning’s CPI report, it appears yesterday’s high reading in the core PPI (0.6%) was just a blip due to the cars and light truck component, and we therefore remain confident that inflation should continue to trend lower. Additionally, in the past we have noted how the commodity survey of the ISM Manufacturing report has been a reliable gauge of future inflation trends, and that index currently remains in a steady downtrend.
Finally, while energy prices seem to be the boogeyman driving inflation, we broke down the components of the CPI to see what has really driven the index higher, and the energy component was number four on the list. Since 2000, overall prices as measured by the CPI have risen slightly more than 20%, but energy has only accounted for 7.7% of the gain, while shelter (38.3%), transportation (15.8%), food and beverages (13.9%), and medical care (10.3%) have all been larger drivers of price increases. We do realize that energy has a smaller weight than some of the other sectors, and that rising energy prices tend to work their way through all sectors, but investors should still be cognizant of the actual dynamics driving inflation.
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“And since the market was quick to dismiss the headline number while oil was rising, it’s only fair that we ignore it while oil is on the way down.”
Core CPI is 2.9% y/y (the highest since 1996); moreover, it is trending up and it is well above the Fed’s comfort zone of 2.0%
How can anybody even suggest that there is nothing to worry about (unless there is a hidden biased agenda for distorting this fact)?
CPI …. y-o-y 2.1%
PPI …. y-o-y 0.9%
The shelter prices will go down soon.
Right now we see temporal effect of high rental occupancy as many people are staying away from buying and prefer renting.
But this happens at the same time as a record low occupancy of homes for sale.
If you shop for a house you’ll see that many if not most homes for sale are already empty. Sooner or later they will end up either on rental market, or will be sold cheap, attracting renters to buy.
But this process is slow. Give it another half-year before shelter price decline will be in headlines.
Thank God the most important item didn’t go up much: recreation and apparel.
over the long run housing prices and rents move together as they should as they are both driven by the same factors.
But over the past decade the cpi for home owners equivalent rent (HOER) has risen as a 4% rate while actual home prices rose at a 10% rate.
So now we are in an era when this unusual development should reverse. So if home prices just stagnate this implies that we will have years when the
hoer will generate upward pressure on the headline cpi.
According to US government calculator $1 USD in 2005 buys $1.04 USD in 2006 (4% inflation)
http://data.bls.gov/cgi-bin/cpicalc.pl
So other than shelter and transportation at 54%, everything else has been rising below average. About what one expects, inflation in necessities not luxuries.
Barry,
I really like this chart.
Hope I remember where it is located in the future.
That sucker is ugly.
Thanks,
MG