I haven’t looked at the inflation breakdown in a while, so I thought I would dust off my old economics degree and take a look. I’m really no economist. But as Richard Thaler showed, the most important thing is some common sense. I had written for a while that you should not expect too much goods inflation (price discovery, technology, free trade, demographics, etc). But I was curious if there were any new developments, since inflation seems to consistently disappoint.
Below is a table of the inflation breakdown of the categories I thought were interesting. Rather than reproduce the entire table, I just listed the sub-categories that changed more than 0.5pp from last year’s yoy figure to this year’s yoy figure (plus “Used Vehicles”, since that was so low). This way, we can figure out how we went from a 2.2% core figure last September to a 1.7% core figure this September.
Core commodities were down 1.0% yoy. A large chunk of this is going to be structural – stores are not only competing with Amazon and Walmart, but now you can get pricing from merchants abroad, and get all kinds of discounts online. Negligible goods price increases are not going to change any time soon. Maybe if the dollar collapses, but that’s an outlier tail.
I mostly want to look at core CPI. The Energy portion is going to be very volatile, and you can see that the hurricanes caused a surge in prices. Food was a little higher, but I suspect that will decline going forward with Amazon and Lidl entering the grocery market. The Fed mostly cares about core, so I’m going to ignore Food and Energy.
One of the places that is probably most affected by technology is auto sales. You can just get an online quote for the car you want from every local dealer, and know all the cost break-downs. But in addition, the auto manufacturers have been overbuilding and have large inventories. So it’s a little surprising that with the surge in demand for post-hurricane vehicles, prices were still lower. What happened was that most of the automakers offered discounts for hurricane victims. $500-1000 in additional discounts is about 1.5-3% on an average car ($33.6K), so perhaps this dip could be temporary. The pricing for used cars is interesting, because it’s fallen like a stone the past two years (plus). Hurricanes and the glut in new cars probably won’t help that story any time soon, but it does take some pressure off of auto inventories.
What’s most interesting is the collapse of medical care commodities. When I think about this category, the first things that come to mind are the Epipen and Shkreli. AND now that we are on the verge of replacing Obamacare, I’m wondering if the pharmaceutical industry is actively keeping a lower profile until the dust settles. At what point does this change? I suppose there is a small chance the government does the “right thing” and clamp down on the monopoly pricing of drugs. I’m not holding my breath though. If this were to happen, we could get a collapse of core goods CPI (I mean some drugs are 100x what they probably “should” cost), but I’m pretty sure the Fed and the markets would discount the precipitous drop in drug prices as a one-off. The cynic in me thinks that what will probably happen though is that once the ink dries on new healthcare legislation, prices will resume its increases. In any event, I’m not sure if medical commodities are a good indicator of what is going on with inflation.
Core services are holding at a respectable 2.6% yoy, but this is 0.6pp lower than last year. Medical care services is growing at a slower rate this year – despite the fact that more baby boomers are retiring and Americans are fatter than ever. So we went from a 4.8% yoy increase last September to a 1.7% yoy increase this year – a year where we are supposed to be talking health care reform. What a strange coincidence. It’s like burglars hiding when the lights come on. Just wait for the homeowners to go back to sleep. All joking aside, there were some Medicare cuts. As the stress grows on Medicare funding (more retirees), you would expect there to be cuts. It’s not clear to me how this will play out longer term for medical pricing.
We probably shouldn’t expect a quick turn-around in medical CPI any time soon. I don’t think any kind of healthcare reform gets done. Trump would need to cross the aisle again, and I don’t think there is enough agreement on the main principles to do that. So we could just get a bunch of poorly-thought-out Trump executive orders. I’m not sure how this plays out with respect to inflation.
The story for some time has been that goods inflation is non-existent (and it may be deflationary), while services inflation has been more robust. I can see how you can call the cell phone competition as “transitory.” Maybe you can call the drop in drug prices “transitory.” There are also upside “transitory” effects, like the hurricane “transportation services” cost surge (maintenance, insurance, etc). If you keep calling everything “transitory,” AND the two main components (shelter and medical) are not really sensitive to market forces, it’s not clear to me what “inflation” is. Looking at the breakdown in inflation was helpful in seeing what things are causing the low inflation. I’m just not sure what gets inflation to turn around. For now, I think I’ll focus more on wages, the USD and inputs (commodities) as a sign of future inflation.
Most places can estimate the PCE from the CPI data. I’m not sure how the calculation would play out. If I were a bull, I would feel some comfort the rest of the month (at least until the PCE print) being long. But we have to see what the ECB says first.