U.S. Consumer Prices Rose 0.2% in August Consumer prices moved higher in August, a sign that U.S. inflation may be continuing to firm after years of sluggish price growth.
Excluding the often-volatile categories of food and energy, so-called core prices rose 0.3%, the largest increase since February.
The strong gains reflected a sharp increase in medical-care prices—up 1%, the largest one-month jump in the category since February 1984. (…)
Compared with a year earlier, overall prices rose 1.1% in August and core prices were up 2.3%. On an annual basis, food prices were unchanged last month—the weakest reading on food inflation since February 2010—and energy prices were down 9.2% on the year. Shelter costs were up 3.4% compared with a year earlier.
MEDIAN CPI UP 0.2% IN AUGUST
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.8% annualized rate) in August. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.6% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.
Over the last 12 months, the median CPI rose 2.6%, the trimmed-mean CPI rose 2.1%, the CPI rose 1.1%, and the CPI less food and energy rose 2.3%.
CPI VS PCE INFLATION
The Fed’s 2% inflation target is based on the Commerce Department’s personal-consumption-expenditures price index. That gauge rose 0.8% in July from a year earlier, and prices excluding food and energy were up 1.6% on the year for the fifth consecutive month.
Growth in core prices tracked by the Labor Department gauge has been higher than growth in core PCE prices, in part because fast-growing housing costs make up a larger share of the basket of goods and services tracked by the CPI.
Another divergence: prices in the health-care sector. The CPI’s gauge of medical-care costs has surged in recent months, building to annual growth of 4.9% in August from 4% in July, 3.6% in June and 3.2% in May. Annual growth in prices for health-care services as tracked by the PCE index has been lower and more stable, hovering around 1% so far this year through July; August data are due out at the end of the month. (…)
This chart plots core CPI and core PCE inflation since 1960. Between 1960 and 1985, they were pretty similar except for 3periods when CPI really overshot. Curiously, CPI inflation regularly exceeded PCE inflation since 1985.
This chart plots the gap between CPI and PCE inflation (core) since 1985.
Jo Craven McGinty in the WSJ in March 2015:
(…) The PCE includes a broader range of expenditures than CPI. It’s weighted according to data provided in business surveys, rather than the less reliable consumer surveys used to weight the CPI. And it uses a formula that adjusts for changes in consumer behavior that occur in the short term, something the standard CPI formula doesn’t do.
The result is a more comprehensive, if less familiar, gauge of inflation. That’s important for the Fed, which regards a small amount of inflation as a sign of a healthy, growing economy.
(…) the CPI (…) captures only what urban consumers spend out-of-pocket for a common basket of goods and services. (…)
PCE, on the other hand, includes all goods and services consumed in the U.S. whether they are purchased by consumers or by employers or federal programs on behalf of consumers.
Medical expenses provide a good example of the differences in approach the gauges take. The CPI includes only the co-payments paid directly by consumers in its calculation, while the PCE captures co-payments as well as costs covered by employer-provided insurance and government programs.
(…) “CPI is just out-of-pocket cost. If it’s paid by Medicare, it doesn’t count. If it’s paid by private insurance, it doesn’t count.”
Because PCE and CPI use different data sources, the relative weights assigned to comparable items differ.
PCE, which is published by the U.S. Commerce Department’s Bureau of Economic Analysis, is derived from retail-sales data collected in business surveys, and in this data, medical care tends to carry the greatest weight. The CPI, on the other hand, is derived from consumer purchases reported in household surveys. Typically, consumers report spending more on shelter than anything else, giving that category more weight in the CPI. (…)
The CPI uses fixed weights generated from a basket of goods that is updated every two years, which doesn’t allow for the introduction of new products or price changes in the interim that might cause consumers to substitute one item for another. (…)
The PCE accounts for this by using chained weighting. For example, if apples suddenly become very expensive, consumers may not buy as many. As a result, the apples will have one weight in one reporting period, and a different weight in the next. The chain-weight index essentially takes the average of the two. (…)
In reality, the divergence in the two measures comes mainly from shelter and healthcare.
The CPI includes Americans’ actual out-of-pocket spending on healthcare. The PCE measure is impacted by congressionally administered costs for Medicare and Medicaid. Unsurprisingly, what ordinary people pay directly is a lot more expensive than what large organizations pay, particularly if they are governmental.
As a result, CPI-Medical Care has been rising much faster than PCE-Health Care:
Until the mid-nineties, both series behaved generally similarly, give or take.
Over the last 15 years, however, health-care related inflation has been measurably higher through the CPI. The gap between the two series has ranged between 0.5% and 1.5% YoY. The gap widened to +2.0% in 2015 and was +2.3% during the first 6 months of 2016, accounting for nearly half of the current +0.6% gap between core CPI and core PCE, even if PCE-Health Care weighs more than CPI-Medical Care.
But the gap widened even more in July (+3.0%) and August (the PCE August data are due out at the end of the month) as the CPI-Medical Care component exploded at a 7.8% annualized rate between May and August with both major components contributing (MoM June, July, August, (Aug. YoY)):
All Medical Care: +0.4% +0.5% +1.0% (+4.9%)
Medical care commodities +1.1% +0.4% +1.1% (+4.5%)
Prescription drugs +1.3% +1.9% +1.3% (+6.3%)
Medical care services: +0.2% +0.5% +0.9% (+5.1%)
Physicians’ services +0.3% +0.7% +0.7% (+4.3%)
Hospital services +0.1% +0.4% +1.7% (+6.2%)
Health insurance +0.4% +0.7% +1.1% (+9.1%)
Meanwhile, PCE-Health Care inflation has been very low so far in 2016 rising only 1.0% YoY in Q2.
This ain’t just an academic exercise. The CPI measures out-of-pocket expenses, i.e. real cash outflow from consumers’ pockets. One, that helps explain why consumer spending remains muted and spotty. Medical costs (10.6% of core CPI, 18% of PCE) are not discretionary. Two, it raises the question as to whether the PCE is currently such a better gauge of inflation if a large part of the gap is because “institutional” prices are rising much less than “consumer” prices.
With an average age of 62, the 10 FOMC members must understand medical expenses although the gap between their remuneration and that of the average American can blur their appreciation of what medical inflation is in real life.
And given all the M&A activity in that sector and the aftermath of the Affordable Care Act, health care inflation does not seem about to abate. From Casey Research:
- Earlier this year, Pennsylvania-based insurer Highmark announced a 41% price increase for 2017 health insurance plans. It’s one of the state’s largest health insurance companies. The company said other insurers across more than 20 states asked for increases of 25% or more.
- Blue Cross Blue Shield of Montana announced a 62% price increase for 2017 rates. In 2016, it implemented a 22% increase. Anthem Inc. will raise rates on Connecticut customers by 27% next year. The list goes on…
- 33% of U.S. counties will only have one health insurance option next year. Another 33% will only have two. Without competition, there’s no limit on how high premium costs can go in these areas.
Anyhow, the point is that the Fed’s focus on PCE is getting more and more questionable given trends in health care and most everything shelter related. FYI, shelter weighs for 15% of PCE, less than half shelter’s 33% CPI weight. Which one is more representative of most Americans’ P&L statement? (Chart from The Daily Shot)
If you had a say at the FOMC meeting this week, would you be in the noflation camp, as “data dependent” as you might be?
After a loooong 18 months of negative surprises, the ESI jumped positive on better jobs growth in the summer, only to return negative recently. The Atlanta Fed GDPNow estimate for Q3 is +3.0% (Sep. 15, next update Sep. 20), down from +3.5% early in September while the NYFed Nowcast was at +2.8% On Sep. 9. (next update Sep. 23). The NYF currently sees +1.7% in Q4…(two charts below from Ed Yardeni)
Meanwhile, FOMC members (also named Federal Open Mouth Committee) keep tripping over themselves to publicly speak their mind, only to confuse everybody and embarrass the chair. This supposedly data dependent Fed, most particularly its chair, seems locked in its we-need-to-raise-rates rhetoric. The risk of policy errors is not low, both on economic and inflation trends. Ben Hunt explains why he expects a rate hike this week in an interesting piece on the decision making process.
All this when the expensive S&P 500 Index is bouncing repeatedly on its 100-day m.a. (2123), still 3.5% above its flattening 200-day m.a.(2060), with the Transports’ continued refusal to acknowledge a new uptrend. In mild corrections, the S&P 500 tends to drop around its 200-day m.a.. In more serious ones, it often dives 5-10% below like in 2010, 2011 and 2015-16.
Should the S&P 500 correct to 7% below its 200 day m.a. to 1915, the Rule of 20 P/E would be back to 19.0, its floor since October 2013 if we exclude the more severe early 2016 correction which brought the Rule of 20 P/E to 18.3 (1850 on current parameters).
Markets Have Become More Dependent on Central Banks, Says BIS Recent developments in financial markets underscore how dependent they have become on central banks, the chief economist of the Bank for International Settlements said.
(…) “It is becoming increasingly evident that central banks have been overburdened for far too long,” said Claudio Borio, chief economist at BIS, a Switzerland-based consortium of central banks. (…)
“There has been a distinctly mixed feel to the recent rally—more stick than carrot, more push than pull, more frustration than joy,” said Mr. Borio. “This explains the nagging question of whether market prices fully reflect the risks ahead. Doubts about valuations seem to have taken hold in recent days. Only time will tell.” (…)
Bank of Japan Readies Its Next Market Jolt The Bank of Japan may emerge from this week’s meeting with a plan to push a key interest rate further below zero. But it is also exploring less-splashy steps, notably changes in how it buys government bonds.
Gavyn Davies: Will the BoJ cause a global bond tantrum?
Trump’s trade policies would send US into recession, study says Clinton’s approach would be harmful’, Trump’s ‘horribly destructive’
Slump in US imports threatens to derail emerging market growth Demand at post-crisis low with China hard hit
(…) Data from the US Federal Reserve show that US merchandise imports from China, the vast majority of which are manufactured goods, have been contracting in value terms since March and in volume terms since April.
Elissa Braunstein, an economist at the UN Conference on Trade and Development (Unctad), said the drop in imports was puzzling due to reports of a recovery in US demand and the strong dollar, which should make imports cheaper and boost demand. (…)
“This is a real worry,” said Simon Evenett, head of the independent Global Trade Alert, which monitors international trade policy. “Most people’s explanation for slowing global trade is that it’s due to China sucking in less imports. But [the US data] point to flat or falling imports in the industrialised countries. The US is in more trouble than people realise.”
He said recent data showing a weaker than expected factory sector in the US added to concerns that the woes of US manufacturing may be spreading to emerging markets through the channel of trade. (…)
China financial stress indicator hits record high as debt surges BIS data shows credit-to-GDP ratio far above historical trend
(…) The BIS is primarily concerned with the accelerating pace at which the debt is being accumulated in China. Its “credit gap” benchmark measures the difference between current debt-to-GDP ratio and that ratio’s long-term historical trend. The BIS rates a reading above 10 per cent as cause for concern; China’s gap hit 30.1 per cent in March.
According to the BIS, this benchmark “has been found to be a useful early warning indicator of financial crises”. (…)
Overall, China’s debt is not high in absolute terms when compared to other large economies. Including government debt, BIS estimates China’s total credit outstanding at $27.2tn, or 255 per cent of GDP, by the end of March. That’s lower than the Euro area at 271 per cent, the United Kingdom at 266 per cent, and Japan at 394 per cent. The aggregate ratio for all advanced economies of 279 per cent.
Yet the speed at which China’s debt has accumulated — up from 147 per cent of GDP at the end of 2008 — raises special concerns, economists say. It is difficult for any country to invest such a large amount of capital efficiently within a brief period. The IMF estimated in June that $1.3tn in credit was outstanding to companies without enough cash flow to make interest payments. Excessive borrowing also explains why it now takes more than three units of new credit to generate one additional unit of GDP, up from less than 1.5 in 2008, according to the IMF. (…)
Many analysts believe that China’s low level of foreign currency debt and its government-controlled banking system make crisis less likely. (…)
Mohammed Barkindo, the secretary-general of the Organization of the Petroleum Exporting Countries said late Saturday that no decision would be made at informal talks among the cartel’s members in Algeria next week.
“It is an informal meeting, it is not a decision-making meeting,” Mr. Barkindo told Algerian state media organization APS on Saturday night. (…)
The biggest problem facing OPEC advocates of a freeze are three countries—Libya, Iran and Nigeria—which combined want to increase their own output by about 1.5 million barrels a day this year.
Libya provided the most recent setback when top oil officials said they planned to quickly increase oil exports after control of several key ports changed hands in recent fighting. If the security situation remains under control, Libyan officials said the oil industry could produce up to one million barrels of oil a day, up from 280,000 a day in August.
“Definitely we will not agree to a freeze without reaching our quota from before,” Libya’s OPEC envoy Mohamed Oun told The Wall Street Journal, referring to 1.6 million barrels a day, the amount OPEC expected Libya to produce before the death and ouster of dictator Moammar Gadhafi sent the country into political chaos. (…)
Heavy-Equipment Glut Weighs on Machine Makers Used machinery is flooding the secondhand market, piling more pain on equipment makers battling slack demand amid a global commodities slump.
(…) The strong U.S. dollar also is damping demand from developing African and Asian markets that once snapped up used machines. (…) “It’s as bad as it’s been in my 30 years,” Mr. Yurkovic said. “A lot of renting. Not a lot of buying.” (…)
With so much equipment up for grabs, used-machinery prices are down 10% from a year ago, Caterpillar says. Its dealers also are under pressure to keep up with price discounts on competitors’ new equipment. Lower prices for new machines provide further downward pressure on used values. (…) Rental businesses account for half of new equipment sales in the U.S., and some analysts see that climbing to 60% within five years. (…)
According to Barclays Research, almost 40% of construction-equipment sales financed by Deere’s credit unit are for leases, up from about 30% two years ago and double a decade ago. Half of Volvo’s financed construction-equipment sales are for leases, up from a quarter 10 years ago, according to Barclays. (…)
Chancellor Angela Merkel’s party was dealt another blow in a regional election, posting its worst result in Berlin since the end of World War II as the anti-immigration Alternative for Germany extended its challenge to the political establishment by siphoning off voters. (…)