I am laser-focused on economic data releases every week, as they give us the best indication of where markets are headed over the near to medium term. This week, we had the CPI update, which wasn’t as bad as it could’ve been… but that doesn’t ease my outlook for inflation in 2021.
Tuesday in Venture Society, I broke down what I think is the most significant component of the Consumer Price Index — shelter.
In that article, I discuss how Shelter CPI is low on an absolute basis but accelerating quickly, as you can see in the chart below.
Source: Seawolf Research
More significantly, it’s important to note that an increase in housing prices eventually leads to an increase in rent. That transition takes some time, usually one to two years, before it shows up in the data because we generally sign rental agreements in one-year increments.
Well, between last year’s spike in housing prices and this year’s rampant return to the city, both primary and owner’s equivalent rent are beginning to inflect and move higher.
Source: Seawolf Research
It may take a while for Shelter CPI numbers to get worked into the headline inflation number in any significant way because they are rising from extreme lows.
So what does that mean for my outlook for inflation in 2021? It means we’re not out of the woods… not by a long shot.
And though I postulated a few issues ago that inflation is changing — basically moving from goods like commodities to services like rent — Wednesday’s Producer Price Index (PPI) data showed me that goods aren’t quite done with us yet.
The PPI for Final Demand nearly doubled expectations on a month-on-month basis, which is enormous.
But moreover, we have to strip out all food, energy AND trade before economist expectations fall back in line.
That means the price of goods aren’t finished inflating yet.
And since PPI is a leading indicator of CPI, it means in turn that these inflation figures are going to stay a lot higher for a lot longer than certain central bankers are prepared for.
Technically, I suppose that qualifies as “transitory” — meaning strictly “not permanent.”
But the data is telling us something about our outlook for inflation in 2021. That there’s one thing this inflationary period won’t be…
All the best,
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