Year: 2021

U.S. Consumer Price Inflation Firms in February; Core Prices Tame

The Consumer Price Index rose 0.4% (1.7% y/y) during February following an unrevised 0.3% January increase. The gain matched expectations in the Action Economics Forecast Survey. The CPI excluding food & energy edged 0.1% higher last month (1.3% y/y) after holding steady for two straight months. A 0.2% February gain had been expected.

Strong energy prices provided much of the lift to last month’s increase with a 3.9% jump (2.4% y/y), following January’s 3.5% rise. Gasoline prices surged 6.4% (1.5% y/y), strong for the third straight month. Natural gas prices strengthened 1.6% (6.7% y/y). Fuel oil prices surged 9.9% NSA (-0.5% y/y) following a 5.4% jump while the cost of electricity improved 0.7% (2.3% y/y) after easing 0.2% in January.

Food prices improved 0.2% (3.6% y/y) last month, after rising 0.1% in January. Food-at-home prices rose 0.3% (3.5% y/y). (…)

Goods prices excluding food & energy edged 0.2% lower (+1.3% y/y) in February after rising 0.1% for two straight months. Apparel prices fell 0.7% (-3.6% y/y) following three months of firm increase. (…) New vehicle prices held steady (1.2% y/y). Used car & truck prices fell 0.9% for the third straight month, but they were 9.3% higher y/y. Medical care product costs were off 0.7% (-2.5% y/y), the sixth straight monthly decline. (…)

Services prices rose 0.2% (1.3% y/y) during February after holding steady for two months. Shelter costs rose 0.2% after six straight months of stability. The 1.5% y/y gain was half the 2019 increase. The owners’ equivalent rent of primary residences increased 0.3% and rose a greatly lessened 2.0% y/y. (…) Medical care services prices improved 0.5% (3.0% y/y) for a second straight month. These gains came after three straight months of decline. The cost of public transportation fell 2.3% (-16.2% y/y).

The components of core inflation have converged to a +1.3% YoY increase:

On a MoM basis, core inflation has been below +0.2% in each of the last 6 months, averaging +0.1% per month. Core Goods prices declined 0.2% last month and are unchanged since September 2020. This is surprising given recent PMI surveys which all pointed to rising input costs being at least partially passed on to clients (other manufacturers, wholesalers, retailers). From Markit’s February U.S. PMI:

As a result, goods producers registered a severe uptick in cost burdens. The rate of input price inflation accelerated to the sharpest since April 2011. Higher raw material prices, notably for steel, and increased transportation costs were widely linked to the rise. The recent strengthening of demand allowed firms to partially pass on higher costs to clients through the fastest rise in charges since July 2008.

From Markit’s February Global PMI:

With rising demand for inputs chasing restricted supply, average input prices increased for the ninth month in a row. Part of the rise in costs was passed onto clients through higher charges. Rates of inflation in both price measures hit near-decade highs, with developed nations seeing (on average) sharper increases than emerging markets.

Since raw materials cost increases are real and well documented and given supply chain problems and surging transportation costs, there seem to be margins problems within the goods sector unless demand is strong enough to offset cost pressures without raising prices.

That could be the case at the retail level where December sales were up 5.9% YoY. However, sales at manufacturers (+0.1%) and wholesalers (+1.7%) seem too weak to provide much of an offset.

Another potential explanation is that Chinese goods, about 33% of goods sold in the U.S., are deflating. China’s non-food prices are down 0.2% YoY in February.

Another curiosity is that Core CPI is now rising more slowly than Core PCE, unseen since 2010:

The Atlanta Fed’s Underlying Inflation Dashboard details various inflation measures. Nothing to boost inflationists so far:

ING: US inflation: a long way to the top

(…) headline inflation is set to hit 3% in April as prices in a vibrant, reopened, supply constrained economy contrast starkly with those of 12 months before when the situation looked dire. Add in rising commodity, energy prices and freight costs that are still working their way through into CPI we expect to see inflation rise above 3.5% in May and June, possibly briefly touching 4%.

US annual inflation with ING forecasts

(…) we agree that 4% inflation isn’t sustainable. For that we would need to see considerable wage inflation coming through very quickly, which doesn’t seem likely when there are 9.5 million fewer people in work than before the pandemic.

That said, we are a little less relaxed than Jerome Powell who only last week suggested that high inflation readings will be “transitory” and the notion of “deeply ingrained” low inflation will not fade fast. We are of the view that inflation could stay in a 2.5-3.5% range for the next couple of years which, if correct, implies more upward pressure on longer dated Treasury yields.

Our more bearish inflation forecast is likely due to our significantly higher than consensus GDP prediction of 6.5% for 2021 and 4.7% for 2022 and our sense there will be lingering supply issues that improve corporate pricing power. It is also heavily influenced by the one-third weighting of housing-related items within the inflation basket.

A reopening economy that is benefiting from pent-up demand, a much improved household balance sheet, a $1.9tn fiscal stimulus coming after nearly $4tn last year and likely followed up by a $3tn+ Build Back Better infrastructure programme plus ongoing support from monetary policy, to us, suggests vigorous growth. It also likely means that the economy will be able to recover all of the lost jobs due to the pandemic well before the end of 2022.

This strong demand will then crash into initial supply constraints in many industries – think restaurants and bars that have gone out of business, airlines that have laid off pilots, companies needing to rework office space, hotels that need to train staff etc. That supply capacity cannot be rebuilt overnight and this means more corporate pricing power that will keep inflation higher for longer.

A prolonged period of rising energy and commodity prices won’t help either. Note that the NFIB (National Federation of Independent Business) survey suggested that a net 34% of small businesses have plans to hike prices in the next three months, matching figures not seen since briefly in the summer of 2008. You then have to go back to the late 1970s to find a higher proportion of companies looking to raise prices.

Rising house prices will translate into higher CPI housing inflation

Then there is the heavy weight of housing within the basket of goods and services. Primary housing rents and owners’ equivalent rent account for a third of the inflation basket. As the chart above shows, official house price changes tend to lead these housing components by around 14 months. Consequently, we strongly suspect that these housing components will turn higher soon and contribute positively to inflation for a significant period.

A final point to consider when looking at medium-term US CPI risks is that while there is significant spare capacity on the basis of employment being down 9.5 million on February 2020, employers don’t seem to be experiencing it.

The same NFIB small business survey showed that a record 40% of American small businesses had job openings they couldn’t fill. With Federal unemployment benefits being uprated to $300/week (as part of the $1.9tn stimulus) and extended out to September, on top of state benefits that average $347 per week, this could mean employers increasingly have to raise wages to try and fill positions.

This is a very different labour market to what we saw as we emerged from the Global Financial Crisis over 10 years ago and again suggests inflation moves higher for longer.

While the Federal Reserve remains relaxed, the bond market is understandably less confident that inflation will stick rigidly to 2% over the medium term. The prospect of inflation staying higher for longer argues for upward moves higher in longer-dated Treasury yields – 2% is an obvious next target, particularly if we start to hear some movement on QE tapering.

We also think this backdrop means it will be increasingly difficult for the Fed to argue that they will be leaving rates on hold until 2024. This is likely to remain the implication from next week’s updated Fed dot plot diagram, but we would not be surprised to see a few Fed officials start to move that forward into 2023.

• Fact vs. Fiction: Understatement of Housing Inflation Exceeds “Bubble” Levels

The understatement of housing inflation in the consumer price index has reached a new milestone. As reported, the gap between the actual change in house prices and owners’ rent, as published by the Bureau of Labor Statistics (BLS), exceeds the “bubble” levels.

In February, BLS reported owner’s rent increased 2% over the last 12 months. House price inflation, as reported by the Federal Housing Finance Agency (FHFA), increased 11.4%. That gap over 900 basis points exceeds the 800 basis point gap recorded during the housing bubble peak.

The consumer price index was created and designed to measure prices paid for purchases of specific goods and services by consumers. The CPI was often referred to as a buyers’ index since it only measured prices “paid” by consumers.

The CPI has lost that designation. It no longer measures actual prices. For the past two decades, BLS imputes the owners’ rent series, using data from the rental market, no longer using price data from the larger single-family market.

Imputing prices for the cost of housing services make the CPI a hybrid index or a cross between a price index and a cost of living index. A hybrid index is not appropriate as a gauge to ascertain price stability, especially when the hypothetical measure of owner’s rent accounts for 30% of the core CPI.

The CPI missed the price “bubble” of the mid-2000s, and the economic and financial fallout was historic. History sometimes repeats itself in economics and finance. Policymakers forewarned.

• Rising food prices could presage global unrest

Global food prices rose by 2.4% in February, according to the Food and Agriculture Organization’s Food Price Index. That marks the ninth straight month of price rises, causing the index — which is adjusted for inflation — to reach its highest level since July 2014.

Bank of Canada holds fast on rates, bond buying; sees economy gathering steam

The central bank kept its policy interest rate at 0.25 per cent, and reiterated that it does not expect to start raising rates until 2023. It also said that it would continue buying $4-billion worth of government of Canada bonds each week, giving few hints as to when it might begin to “taper” its quantitative easing program. (…)

“The economy is proving to be more resilient than anticipated to the second wave of the virus and the associated containment measures,” the bank said in Wednesday’s one-page statement. It noted that GDP growth in the fourth quarter of 2020 was 9.6 per cent on an annualized basis, twice what the bank had forecast in January, and that GDP is now expected to grow in the first quarter of 2021 rather than contract.

“Consumers and businesses are adapting to containment measures, and housing market activity has been much stronger than expected. Improving foreign demand and higher commodity prices have also brightened the prospects for exports and business investment,” it said.

At the same time, it noted that there is still considerable slack in the economy and uncertainty about the evolution of COVID-19. It said the labour market is “a long way from recovery,” noting that employment is still well below prepandemic levels, and that low-wage workers, young people and women have been hit the hardest.

(…) the bank said the year-over-year rate of inflation will likely tick up in the coming months, as current prices for goods and services – most notably the price of oil – are compared with prices depressed at the outset of the pandemic. Although it reiterated its view that inflation will moderate in the second half of the year, as “excess capacity continues to exert downward pressure.” It noted that measures of core inflation currently range from 1.3 per cent to 2 per cent.

A $60 billion surprise in the Covid relief bill: Tax hikes Democrats tucked in a trio of little-noticed tax hikes on the wealthy and big corporations.

One takes away deductions for publicly traded companies that pay top employees more than $1 million. Another provision cracks down on how multinational corporations do their taxes. A third targets how owners of unincorporated businesses account for their losses.

It’s surprising because Democrats were widely expected to put off their tax-increase plans until later. Many lawmakers are wary of hiking them now, when the economy is still struggling with the coronavirus pandemic. If anything, when it came to their stimulus plan, Democrats were focused on cutting taxes, not increasing them.

But they ran into problems complying with the stringent budget rules surrounding so-called reconciliation measures like the coronavirus legislation — especially after some wanted to add provisions like one waiving taxes on unemployment benefits.

If Democrats exceeded their $1.9 trillion budget cap for the plan, they would lose the procedural protections that were used to shield the entire measure from a Republican filibuster in the Senate.

The tax increases Democrats picked to help keep their plan’s cost in check had the political benefit of being arcane. Unlike things like raising the corporate tax rate or upping the top marginal tax rate on the rich, the ones they chose won’t produce many headlines. (…)

Congress Eyes Antitrust Changes to Counter Big Tech, Consolidation Both Democrats and Republicans have talked about a need to strengthen U.S. antitrust law. This year could test whether they are serious about hammering out legislation to make it happen.

Congress is considering the most significant changes to antitrust law in decades, including some proposals with bipartisan support. Lawmakers are looking at setting a higher bar for acquisitions by companies that dominate their markets; making it easier for the government to challenge anticompetitive conduct; and potentially forcing some giant tech companies to separate different lines of their businesses. (…)

The Senate will begin its discussion in earnest Thursday, when an antitrust subcommittee led by Sen. Amy Klobuchar (D., Minn.) holds its first hearing on possible reforms. (…)

“It’s not just tech, it’s cat food to caskets,” Ms. Klobuchar said. (…)

“There appears to be a broad consensus that the status quo isn’t working,” Sen. Mike Lee (R., Utah), the leading Republican on the Senate antitrust panel, said recently, though he warned against what he called a desire by some Democrats to “seize this moment to radically alter our antitrust enforcement regime.” (…)

Meanwhile, a House antitrust panel led by Rep. David Cicilline (D., R.I.) will conduct a hearing Friday to discuss a bipartisan proposal to allow local news outlets to join to negotiate with dominant platforms such as Alphabet Inc.’s Google and Facebook Inc. (…)

• EU struggles to build antitrust case against Amazon Regulators face difficulties gathering evidence against tech giant nearly two years after probe was announced

COVID-19

• The U.S. is on target to meet President Biden’s goal that every American adult who wants a vaccine will be able to get one by the end of May. (Axios) The U.S. is administering over 2 million shots per day, on average. Roughly 25% of the adult population has gotten at least one shot.
• Vaccine recipients wait to learn if they can still pass on Covid Researchers think vaccines reduce transmission but are still trying to understand by how much
• Pfizer-BioNTech Covid Vaccine Blocks Most Spread in Israel Study
• Denmark Suspends AstraZeneca Vaccine on Clot Concerns Decision comes after one person died following inoculation
• EU Governments Are Bracing for More Covid Vaccine Delays
• New Biotechnology Covid Treatment Reduces Risk of Death
• GSK Covid treatment shows ‘profound efficacy’ in initial trial Data from 583 patients shows 85% reduction in hospitalisation or death
• One in Five U.S. Adults Say They May Not Take Covid-19 Vaccine

CPI for all items rises 0.4% in February as gasoline index continues to rise

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in February on a seasonally adjusted basis after rising 0.3 percent in January, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.

The index for all items less food and energy rose 0.1 percent in February. The indexes for shelter, recreation, medical care, and motor vehicle insurance all increased over the month. The indexes for airline fares, used cars and trucks, and apparel all declined in February.

The all items index rose 1.7 percent for the 12 months ending February, a larger increase than the 1.4-percent reported for the period ending in January. The index for all items less food and energy rose 1.3 percent over the last 12 months, a smaller increase than the 1.4-percent rise for the 12 months ending January. The food index rose 3.6 percent over the last 12 months, while the energy index increased 2.4 percent over that period.

Core CPI is up only 0.1, or 0.4% annualized in the last 3 months. Core Goods is -0.2% in February, zero in the last 3 and 5 months!

America’s $5 trillion bet

From Axios’ Felix Salmon:

Once President Biden signs the latest relief bill into law, Washington will have spent more than $5 trillion in less than a year — far more than it has in past crises.

In a letter to colleagues Tuesday night, Senate Majority Leader Chuck Schumer wrote that the poorest 20% of Americans are estimated to see about a 20% boost in income from Biden’s bill, citing an analysis from the Tax Policy Center.

• 85% of households will get $1,400 in stimulus checks; the unemployed will receive an additional $300 per week through the fall; and families with children under 17 will get $3,000 per child.
• That’s in addition to increased rental assistance, food aid and health insurance subsidies. A recent Washington Post analysis found that 54% of Biden’s package provides direct aid to individuals, compared with 40% or less in previous packages.

This bill and the series of other COVID-19 packages passed in the last year work out to just over $43,000 per U.S. household — the type of spending that would have been unthinkable as recently as 2009, when Biden was last in office. (…)

Economists predict the economy will grow at a pace of well over 6% in both the second and third quarters of 2021 as Biden’s stimulus plan kicks in, according to FactSet.

• This time last year, the Wall Street consensus was that a coronavirus-addled economy would grow by only 2% in 2021.
• Congressional aides say that the expected economic boon, in conjunction with scientists promising a light at the end of the pandemic tunnel, mean this $2 trillion bill is likely the last mammoth COVID-related package we’ll see.

Small Business Optimism Improves Slightly in February

• Outlook at cyclical lows:
• Sales and earnings not recovering yet:

• Rising prices and hoping for even more:

• “Forty percent of owners reported job openings that could not be filled, an increase of seven points from January.” But keeping compensation low:

• Job openings rising but planned employed declining…

• While large companies’ confidence is at cycle highs:

THE INFLATION DEBATE

Double Line’s Jeff Gundlach expects headline inflation to be over 3% for a few months this summer. Contrary to David Rosenberg (discussed here An Inflated Post on Inflation), he finds a good correlation between ISM Prices aid and the CPI and says that one could plausibly see headline inflation exceeding 4%. “That would really spook the bond market.”

Andrew Cates (for Have Analytics) sees inflation as only transitory as stronger demand will be offset by improving supply:

(…) An intriguing chart that puts recent moves into context is shown in figure 3 below. It compares the yield on 10 year US Treasuries with an index that’s designed to measure the pace of global economic activity in commodity markets. The latter is calculated by the Dallas Fed and derived from a panel of dollar-denominated global bulk dry cargo shipping rates. It may be viewed therefore as a proxy for the volume of shipping in industrial commodity markets.

Figure 3: Global economic activity in commodity markets versus US 10 year Treasury yields

As an aside, check how the pandemic has impacted shipping rates (from DoubleLine):

Freight Container Rates (HK to LA)

The chart is intriguing because the correlation between the two variables – until recently – has been impressive (around 75% from 2007 to 2020). It’s intriguing though as well because some of the recent concerns about inflation stem in part from firmer commodity prices. It’s admittedly still difficult to draw strong conclusions from this because in theory there are many moving parts to gyrations in bond yields.

The chart nevertheless suggests that yields still appear to be quite low relative to the measured pace of activity in industrial commodities in recent weeks. Indeed the recent climb in yields looks entirely warranted relative to the rebound in activity and that a further increase ought to not necessarily come as a big surprise. That said ultra-loose monetary policy – and Central Banks’ bond buying programmes in particular – are a key factor that are suppressing long rates relative to the underlying pace of economic growth. Absent any major shift in these policies – which seems unlikely based on recent rhetoric – and a further sharp upward shift in long term rates seems unlikely.

The still unanswered element to this though is the degree to which firmer activity in these commodity markets heralds higher inflation in the period ahead. To some extent that seems inevitable given the strong links between higher oil prices and the energy components of headline consumer prices. There are some base effects from the plunge in activity – and some prices – that took place last year that will equally put upward pressure on CPI inflation in the coming months.

As we discussed in our last commentary (see Inflation Fears Are Probably Over-stated) what really matters now is how second round effects on wages and inflation expectations now play out. And that will largely hinge on issues such as spare capacity.

On that score though there was further evidence in the detail of the recent raft of purchasing managers’ surveys that suggest inflation fears may be over-stated. For example much of the recent sharp climb in the output price component of these surveys coincided with supply chain disruption and delivery delays as well as rising cost inflation. Indeed average supplier lead times lengthened to the second greatest extent in the global manufacturing survey’s history with almost all of the nations covered reporting an increase (see figure 4 below).

This supply chain pressure though has not – judging by other components of this index – been a manifestation of soaring demand. Instead it seems much more likely to have been a consequence of the pandemic and the tighter restrictions that have been placed on the movement of factors of production (including labour).

Figure 4: Global manufacturing PMI: Output prices and supplier delivery times

If that’s right it implies that as vaccines take effect, as fear unwinds, and as government lockdown restrictions ease these supply chain pressures also ought to ease. Indeed just as the onset of the pandemic triggered both a negative demand and a negative supply shock so the easing of the pandemic ought to trigger a positive demand and a positive supply response. And the latter ought to mitigate some of the inflationary consequences that could stem from the former.

With yesterday’s release of February’s NFIB, Nordea updated this chart and commented:

Our, slightly manicured NFIB price survey, hints of 2.75-3% core inflation already over the next six months. Inflation will accordingly likely print markedly above the Fed target, also in core terms, already before summer. The Fed is only partially aware of it, and it will be tricky for Jay Powell and his lieutenants to handle the rhetoric around the average inflation target regime once inflation starts overshooting markedly. It is so much easier to defend AIT when inflation runs below target.

Brace yourself. Core inflation is coming

Flood of New Debt Tests Weakening Bond Market Supply is seen as one factor driving Treasury yields higher as investors anticipate an economic resurgence fueled by vaccinations and government stimulus.

Treasury Bond Sentiment

Source: Bloomberg, Rosenberg Research

Who’s Buying Treasuries?

Source: DoubleLine

7-year Treasury Auction:Foreigners Retreated Sharply Last Week

Source: Bloomberg, DoubleLine. UST -U.S. Treasury.

Meanwhile:

Data: Investing.com; Chart: Axios Visuals

Royal Bank CEO Dave McKay expects faster recovery to pressure central banks to raise rates as early as next year

(…) With rising input prices for labour and commodities, it could create a challenge for central bankers, Mr. McKay said in a webcast speech at the RBC Capital Markets Financial Institutions Conference.

“We see inflationary pressure building earlier than later on those goods and services,” Mr. McKay said.

“We do see a challenge to the policy and, therefore, central banks having to respond to this in 2022, the latter half of 2022, with rate increases. Versus where you might have thought – late 2023, even 2024 – six months ago.” (…)

For U.S. Farmers, China Is Back and Bigger than Ever Record exports follow a painful trade war, but concerns remain: ‘We can’t just be reliant on one partner’

(…) U.S. agricultural exports to China in 2020 rose to 55.5 million tons and comprised one-quarter of all farm shipments, according to U.S. Agriculture Department data. China is now buying more farm goods than it did before the trade war, and U.S. agricultural officials expect Chinese demand to grow further. (…)

China’s race to fatten its hogs helped drive a 53% jump in U.S. soybean exports to the country last year compared with 2019, representing the second-highest volume on record and more than half of all soybean shipments, according to USDA. Corn exports soared more than 20-fold to a new high. (…)

In the first eight weeks of this year, Chinese buyers have purchased nearly triple the amount of U.S. soybeans compared with the same period a year earlier. Prices for the oilseeds are up 64% from year-ago levels. In response, U.S. farmers are expected to plant a record 182 million acres of corn and soybeans this spring, boosting soybean acreage by seven million from 2020, according to a USDA forecast.

Grain-trading giants that are pumping out feed ingredients for Chinese hog farmers say they expect the strong demand to continue. Chinese purchases are helping draw down U.S. corn and soybean stockpiles, prompting domestic processors to rush to lock in supplies and boosting some food prices for consumers. (…)

States Expected the Pandemic to Bring Widespread Tax Shortfalls. It Didn’t Happen. Despite the pandemic’s crushing toll on the economy, total state-tax revenues were roughly flat in 2020 from the year before, aided by stimulus checks and the stock-market recovery.

(…) Net new supply of two- to 30-year Treasurys is expected to reach $2.8 trillion this year, according to BofA Global Research, up from $1.7 trillion last year and around $990 billion in 2019. The Fed, meanwhile, is expected to purchase $960 billion of Treasurys, down from more than $2 trillion last year. (…)

One piece of good news for investors is that the Treasury Department may not need to increase the amount of notes and bonds it issues to fund the $1.9 trillion coronavirus relief package that President Biden is expected to sign shortly, analysts said, given its cash on hand and the size of current auctions. (…)

In recent weeks, congressional Democrats and the Biden administration have signaled interest in another multitrillion-dollar spending package to update the country’s infrastructure. (…)

The Treasury sold another $58 billion of three-year notes on Tuesday and is scheduled to issue $38 billion of 10-year notes Wednesday and $24 billion of 30-year bonds on Thursday. A year ago, auctions of the same bonds totaled $38 billion, $24 billion and $16 billion respectively. (…)