Broad Rebound in Consumer Prices But Still Benign Year-Over-Year

Mish

Prices rallied for the second month but year-over-year prices are still benign.

CPI Up 0.4% in August

The Consumer Price Index for August  increased 0.4 percent in August on a  seasonally adjusted basis after rising 0.6 percent in July. 

Key Points 

  • The monthly increase in the seasonally adjusted all items index was broad-based; a sharp rise in the used cars and trucks index was the largest factor, but the indexes for gasoline, shelter, recreation, and household furnishings and operations also contributed. 
  • The energy index rose 0.9 percent in August as the gasoline index rose 2.0 percent. The food index rose 0.1 percent in August after falling in July; an increase in the food away from home index more than offset a slight decline in the food at home index. 
  • The index for all items less food and energy rose 0.4 percent in August after increasing 0.6 percent in July. 
  • The sharp rise in the index for used cars and trucks accounted for over 40 percent of the increase
  • The indexes for shelter, recreation, household furnishings and operations, apparel, motor vehicle insurance, and airline fares also rose. 
  • The indexes for education and personal care were among the few to decline. 

CPI and Core CPI Year-Over Year

CPI and Core CPI Year-Over-Year 2020-08

Year-Over-Year Details

  • The all items index increased 1.3 percent for the 12 months ending August; this figure has been rising since the period ending May 2020, when the 12-month increase was 0.1 percent. 
  • The index for all items less food and energy increased 1.7 percent over the last 12 months. The food index increased 4.1 percent over the last 12 months, with the index for food at home rising 4.6 percent. 
  • Despite recent monthly increases, the energy index fell 9.0 percent over the last 12 months.

Poor Measure of Inflation

These indexes supposedly measure inflation.

They do nothing of the kind. The indexes do not include home prices, only rent.

The purported medical inflation is a joke. Anyone who buys their own medical insurance will tell you their costs are up more than the reported 5.9%.

Anyone in college has not been pleased with the rising cost of tuition and rent in college towns.

And anyone with an ounce of common sense knows the current stock market bubble is a measure of inflation.

Focus on Consumer Inflation is Horribly Wrong

Stock prices are not "consumer" inflation, but realistically home prices are. 

Regardless, the Fed's focus on consumer inflation ignoring housing, while averaging medical costs with those on company plans and Medicare is just plain wrong.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Fed Can Blame Itself

I am not blaming the Fed for the coronavirus and these shocks.

However, I am blaming the Fed for its erroneous inflationary tactics that blew three of the biggest economic bubble in succession: 2000, 2007, 2020.

Mish

Comments (27)
No. 1-13
jivefive99
jivefive99

Until oil/gasoline/diesel prices start going up, there will be no acknowledgment of any inflation, real or imagined. The 1970s were the only recent instance of mega-inflation, and we know exactly what caused that. Oil.

Tony Bennett
Tony Bennett

Free Money (fiscal stimulus)

Free Shelter (forbearance / moratorium rent and mortgage)

Of course, a pulse of inflation.

It will be paid back ... in spades.

Tony Bennett
Tony Bennett

Disinflation (deflation) will occur when credit tightens ... and it is ... todays drip:

The Mortgage Bankers Association's (MBA's) Mortgage Credit Availability Index (MCAI) continued to drop in August, an indication that lending standards are tightening. The index fell by 4.7 percent to 120.9 in August. In January, before interest rates started an unprecedented decline and servicers were instructed to grant forbearances to existing borrowers, the MCAI was at 181.9. It was benchmarked to 100 in March 2012.

...

"Mortgage credit supply fell to its lowest level since March 2014, driven by a reduction in supply from both conventional and government segments of the market," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "Additionally, both conforming and jumbo sub-indexes fell by almost 9 percent each, with the conforming index declining to the lowest reading since MBA's series began in 2011. Credit continues to tighten because of uncertainty still looming around the health of the job market, even as other data on loan applications and home sales show a sharp rebound. A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability."

Added Kan, "Jumbo credit availability has fallen around 59 percent since the pre-pandemic months, and data from MBA's Weekly Applications Survey showed that jumbo mortgage rates stayed over 30 basis points higher than conforming rates in August, which is another indication of the reduced investor appetite for those loans."

Tony Bennett
Tony Bennett

Alan Greenspan weighing in on inflation. NOT bullish.

CNBC:

"But my overall view is that the inflation outlook is unfortunately negative and essentially the result of basically the huge increase in entitlements that are crowding out our private investment and productivity growth, which incidentally, not only importantly, is slowing down to about a 1% annual rate.”

KidHorn
KidHorn

I'm guessing used cars up for 2 reasons. People fleeing cities need a car since they can't use mass transit and are hesitant to invest too much in a new car thinking they may move back to a city once things quiet down. And people no longer commuting, so they see less benefit in buying a new car. A used car is good enough for their needs.

Eddie_T
Eddie_T

"Anyone who buys their own medical insurance will tell you their costs are up more than the reported 5.9%."

Check.

On a personal note, I have reached that milestone known as the Medicare enrollment period...so my thirty plus years of watching my healthcare premiums go up each and every year will be somewhat modified, although it won't be a radical change since I have no intention of retiring anytime soon. But healthcare insurance has been one of the biggest drains on my financial wellness throughout my self-employment career.

"Stock prices are not "consumer" inflation, but realistically home prices are. "

Check.

That's why I'm contemplating one more 1031 Exchange sometime soon. Rents will catch up here, and it won't take long with Cali and Oregon on fire. I am sorry for what is going on out there, but it will drive RE higher in some places.

I am expecting credit to dry up, which as someone named Mish once taught me, is deflationary. Props to Tony Bennett for his comment.

Sechel
Sechel

rally almost makes it seem like a good thing. i don't normaly consider rising prices a positive

Jojo
Jojo

Another take on prices and inflation:

Everyday Prices Pushed Higher by Phone Service and Restaurants
Robert Hughes
– September 11, 2020

Tony Bennett
Tony Bennett

Loss of income won't support inflationistas argument.

Census Bureau back with their Household Pulse Survey.

Current week 26.2% of all adults expect someone in their household to lose employment income in next 4 weeks.

Carl_R
Carl_R

The inflation predictor has now been updated for the most recent numbers. It now shows inflation rising to the 3.5% range by April, when the year over year data is compared to the period of very, very low gas prices:

Herkie
Herkie

Mish; I know you are using a bit of brevity when you say "The indexes do not include home prices, only rent." But they do not even include rent, but what they call Owners Equivalent Rent. It is a survey where they supposedly call up homeowners and ask them how much they would have to pay to rent an identical house if they had to do that. What would they expect to pay?

Homeowners OWN their houses, they are not in the rental market. Most people who own houses have exactly no idea whatever what is going on with rents in their area and the longer they have owned the lower their estimate of local rents will be. When I moved away from Medford because rents had risen by nearly 100% in 5 years and I simply could not take another rent increase how many people who own houses do you think are glued to CraigsList looking at what rents are doing? Most simply do not care what rents are doing, unless they are planning to move and rent their houses out. (by the way, after the fires last week when more than 100 businesses and early estimates say over 750 homes went up in smoke, the vacancy rate which was under 1% will now be negative there, meaning there are not enough housing units left in the valley to house all the people even if every house was filled and rented zero vacancy means bidding wars for housing).

So, as a, or should I say THE - largest single weighted item of expense in the entire CPI they use data they know for a fact is wrong, even when there are now better sources for real time house price movements. But, they will never use those to calculate a truer CPI because if they did they would have to give old and disabled people enough to live on, not to mention the CPI guides federal, state, and union salaries.

GEICO has a request in to raise their rates in the state of Florida for more than 7%, they have to justify this with state regulators and they cite as the main reason the rising cost of auto repairs. Of all the economic inputs that drive insurance outflows the cost of repairs has risen so far so fast that in spite of a huge drop in miles driven and the number of claims, they say they need a more than 7% raise. My question is why has the cost of auto repairs actually exceeded even the inflation in such things as healthcare, tuition, and housing itself?

By the way, I just looked on the state's insurance regulator's web page at pending insurance increase requests and homeowner insurance requests (there are only 7 insurers underwritting policy in the state now) range as high as almost 30%. Not only that but they are expanding the so called high risk areas that mean increased deductibles, mine are already at 5% for most claims and 6% of the policy value for hurricane related claims. That represents a HUGE increase on insurance costs that are not measured because they only get recognized if there is a claim, but the cost is very real if you do have a claim. If it is safe enough that you never have any claims then why requires us to buy a product so savagely priced? I pay over $1,500 per year. When I left Florida in August 2000 to move to NY I had a comparable house in Tallahassee my insurance was $360 per year. That is more than 16% per year year after year over time. Yet people will reply and say there is NO INFLATION!

Is it gouging motorists just because they can? Or are they in turn reacting to the REAL increase in the cost of living? To me it is no matter, I am with GEICO because they are half what the next lowest rate would be for insurance here.

The real driver of insurance cost is this, insurance companies have enormous pools of money in the billions and even hundreds of billions of dollars which is what they pay out from in the event of a major catastrophe, and that cash (cash equivalent) hoard usually earns enough in dividends and interest that premiums are only a part of where their income is derived. Claims paid out exceed premiums paid in even in the good years. In other words their investments of that cash pile earn so much that most years part of it is passed on to customers, it is like you are paying into a giant investment firm that in turn will cover you when you get in an accident.

Now though, we are in a ZIRP and even negative real interest rate environment, and those mountains of funds do not generate any real value at all and in fact are becoming just another liability. Remember that insurance companies by law can only invest their funds in very low risk investment grade securities, if those take a fall then they have to get income to pay claims somewhere. If they keep dipping into the principal they will find themselves rapidly going out of business. It is worth noting that trillions of dollars worth of REGULATED investment are required to compete for the same safety rated investment vehicles so that as their prices rise from this competition the yield inversely falls. And they have no choice, except to move to cash so they stop hemorrhaging their funds. But, in cash they then require premiums to pay all claims and other costs of doing business. Regulators cannot dictate what yields they can get from those safe investments.

This is why I warned your readers last year to beware of their insurance bills later this year or next when they go to renew. Insurance comapnies do not want to tell the truth because it puts their own stock at risk, but the reality is they are going to have to raise premiums to cover all their costs of doing business and most especially the cost of all claims.

This is why healthcare insurance is and always will be on a never ending treadmill grinding higher and higher. There is no incentive of doctors/hospitals to contain costs, and insurers in the field have not got the gigantic cash pools earning them part of what they need to stay in business, they spend it all as soon as claims are presented. Not only that but they are requiring us to pay all their costs of doing business on top of claims. So, in the case of healthcare insurance they add about 30% to the real costs without contributing anything to health outcomes.

Under those circumstances the insurance industry business model is broken and the government would do us a huge favor by banning private insurance. The government is the only entity large enough to pay all claims as they come in without that massive income from the huge cash hoards insurance companies are required by law to maintain.

But that is my little hobby horse, and realistically I know they are never going to ban private for obscene profit insurance no matter how bad it is worsening our situations.

This is about inflation, and my personal experience with it is even in the much touted electronics sphere where prices are supposedly dropping, inflation, REAL inflation, is cruising along at more than 10%, sure you might not notice when some item or other goes up from $1.29 up to $1.79 over a two year period, but that is still almost 20% per year. And almost everything has gone up. Like for example those huge Hershey bars, I buy those because I find a square of chocolate at bedtime helps me go to sleep, picked up the habit from those little mints they used to leave on your pillow in hotels. Last year they were $1.89 and yesterday they were $2.34. How many out there realize that is 23.8% inflation? It happened after months of not being able to get them in the start of the pandemic, when they returned to the shelves they did so at a much higher price.

I can sit here all day naming item after item that has risen by at least 10% this year and many things by double that, a few things by 100% or more. And the reasons they cite for the increase simply do not matter when calculating increases, it does not matter WHY they went up, only that they did go up. When people try to tell you WHY they are trying deflect blame since it is not THEIR FAULT the price went up right? And it also holds out the hope that the increase is only temporary and prices will drop after the pandemic or after China stops retaliating for Trump's trade war. Whatever. I am often tempted to tell them "fine, I will come back and buy the item then."

I am on a fixed income that is tied to the CPI, I watch prices very closely because inevitably I have to cut out items that rise in excess of stated inflation, I have no choice when the basics are also rising faster than the CPI. At my income level if I did not do this I would very soon find myself living in my car as I was facing in Oregon till it was obvious I had to abandon the state over housing costs.

This year upcoming will be worse. The August CPI measuring period is over and the consensus among prognosticators is that the COLA for 2021 will be no more than 0.3% if there is any raise at all. This is in a time when they cannot possibly have gotten a fair read on prices since in many cases items are not even consistantly available. And when items are available lower priced items are gone as soon as they hit the shelves leaving only the delux higher priced versions available. Yet even now they apply the substitution method to state a lower price even though that is now working in reverse with only higher priced items remaining to be bought. As I complained of having to buy Scott's weed and feed a couple weeks ago at $51 and change per bag when I had bought another brand for about $30 in April. Now only the hyper expensive brand is still on the shelf.

We are screwed as this will only gain momentum.

paul2090
paul2090

The idea that food prices are up ).1% is looney. Food has skyrocketed. Pork prices have almost doubled since last year. Beef is in the stratosphere. Tomatoes are $3 a pound IN THE MIDDLE OF HARVEST SEASON? Also, because Americans have become germaphobes, the price of cleaning supplies, if you can find them, is off the charts.

Away from food, the price of 5/8ths inch plywood sheathing is $42 a sheet!

The reason inflation appears low is because economists don't shop, they just fixate on government monetary aggregates, which are "hedonically adjusted."


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