Uncategorized
Slicing and dicing the CPI
admin | May 15, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Collecting price data is especially problematic when huge swaths of the economy are essentially closed. Nonetheless, the Bureau of Labor Statistics slogged ahead and produced the April CPI. Inflation posted disturbingly large declines both for the total and core component. But the price drops were strikingly narrow. An alternative filter, the Cleveland Fed Median CPI, offers a very different view of inflation.
March and April CPI
The CPI in April sank by 0.8%, the sharpest monthly fall since 2008. Energy prices plunged by more than 10%, reflecting a more than 20% seasonally adjusted drop in gasoline prices. Meanwhile, the core CPI decreased by 0.4% last month, the steepest fall on record going back to 1957. Within the core, there were big decreases for hotel rates (8.1%), airfares (15.2%), apparel (4.7%), and motor vehicle insurance (7.2%). The first three relate to sectors where activity was virtually non-existent, while the latter reflects a decision by major insurers to offer rebates to customers since there is so much less driving and, as a result, far fewer accidents and claims. It is debatable whether that decision by auto insurers is a price cut at all, but the BLS viewed it that way. In any case, excluding those four items, the core CPI actually rose by 0.1%
Looking back to March, the story was similar. Headline inflation declined by 0.4%, while the core index slipped by 0.1%. Energy costs dropped by more than 5%, while the core component was driven mainly by three of the same categories cited for April. Hotel rates (-7.7%), airfares (-12.6%), and apparel (2.0%) drove the core component in March into negative territory. Excluding those three categories, the core would have posted a pedestrian 0.2% rise.
Cleveland Fed alternative inflation gauges
The Cleveland Fed for years has produced two alternative measures of CPI inflation that could be thought of as competitors with the core index to offer an accurate view of underlying inflation trends. The core index arbitrarily labels food and energy prices as excessively volatile and focuses on everything else. The Cleveland Fed research effort allows the data each month to determine which line items are outliers.
The first gauge is the median CPI. This concept is simple. Each line item in the CPI is ranked according to the one-month price change and weighted by its importance in the CPI. The line item that includes the 50th percentile of that ranking is the median CPI. The same procedure is reported for 12-month changes as well, to offer an alternative year-over-year gauge. So, the idea is to find the line item that is exactly in the middle, as that should tell us something about general price trends.
The second gauge is similar, a 16% trimmed-mean CPI. Once again, the categories are ranked by price change and weighted by relative importance in the CPI. For the trimmed-mean CPI, however, only the extremes are excluded, in this case, the top and bottom 8% of the index by weighting. Again, the Cleveland Fed produces 1-month and 12-month changes for the trimmed-mean CPI.
Recent performance
The median CPI and 16% trimmed-mean CPI have softened by far less than the headline figures. On a 1-month basis, the median CPI increased by 0.2% in March and 0.1% in April, while the trimmed-mean CPI advanced by 0.2% in March and was flat in April. While the figures were slightly softer than prior trends, they were far from alarming.
Meanwhile, on a 12-month basis, the results are similarly at odds with the more traditional figures. The median CPI decelerated by only one tenth on a year-over-year basis from February to April, inching down from 2.8% to 2.7%. The moderation in the year-over-year trimmed mean CPI was two tenths, from 2.4% to 2.2% (see Exhibit 1). In contrast, the headline and core CPI have cooled by roughly two full percentage points and one full percentage point respectively over the same period.
Exhibit 1: Alternative Year-over-Year CPI Gauges
Conclusion
The March and April CPI figures have been shockingly weak, sparking widespread speculation in the financial markets that the U.S. could be headed toward a prolonged stretch of disinflationary and possibly even deflationary conditions. However, the softness has mainly reflected a handful of categories that have been especially distorted by the response to the virus. Filtering out the outlier categories, inflation has only cooled marginally, at least so far. The medium-term inflation story is still very much up in the air and not yet a convincing sign that the U.S. is in danger of a deflationary spiral.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
