by Bill McBride on 10/22/2014 07:41:00 PM
Wednesday, October 22, 2014
From Kathleen Madigan at the WSJ: Why Rising Rents Haven’t Pumped Up Inflation
For the 12 months ended in September, [owners’ equivalent rent] OER is up 2.7%, up from 2.2% a year ago. (Actual rent paid by tenants is up a faster 3.3%.)Without OER, inflation would be even lower. If we look at shelter1, All times less Shelter is up just 1.1% year-over-year, and All items less food, shelter, and energy is only up 0.9%.
OER is the big gorilla in the inflation room. It accounts for 24% of the total CPI and 31% of the core. So why isn’t the accelerating OER rate pushing up the core? Because other factors are offsetting the upward push.
The biggest drag is the downward pressure on goods prices coming from overseas. ... On the service side, other major categories have seen a slowdown in markups.
Rents can't keep rising this quickly without rising wages. And without rising rents, inflation would be even lower.
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 285 thousand from 264 thousand.
• Also at 8:30 AM, the Chicago Fed National Activity Index for September. This is a composite index of other data.
• At 9:00 AM, the FHFA House Price Index for August. This was originally a GSE only repeat sales, however there is also an expanded index. The consensus is for a 0.3% increase.
• At 9:00 AM, the Kansas City Fed manufacturing survey for October.
1 From the BLS: "Rent of primary residence (rent) and Owners' equivalent rent of primary residence (rental equivalence) are the two main shelter components of the Consumer Price Index (CPI)."
by Bill McBride on 10/22/2014 04:31:00 PM
With QE3 expected to end next week, by request, here is an updated timeline of QE (and Twist operations):
• November 25, 2008: Press Release: $100 Billion GSE direct obligations, $500 billion in MBS
• December 16, 2008 FOMC Statement: Evaluating benefits of purchasing longer-term Treasury Securities
• January 28, 2009: FOMC Statement: FOMC Stands Ready to expand program.
• March 18, 2009: FOMC Statement: Expand MBS program to $1.25 trillion, buy up to $300 billion of longer-term Treasury securities
• March 31, 2010: QE1 purchases were completed at the end of Q1 2010.
• August 27, 2010: Fed Chairman Ben Bernanke hints at QE2: Analysis: Bernanke paves the way for QE2
• November 3, 2010: FOMC Statement: $600 Billion QE2 announced.
• June 30, 2011: QE2 purchases were completed at the end of Q2 2011.
This graph show the S&P 500 and the Fed actions. Click on graph for larger image.
• September 21, 2011: "Operation Twist" announced. "The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less."
• June 20, 2012: "Operation Twist" extended. "The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities."
• August 31, 2012: Fed Chairman Ben Bernanke hints at QE3: Analysis: Bernanke Clears the way for QE3 in September
• September 13, 2012: FOMC Statement: $40 Billion per month QE3 announced.
• December 12, 2012: FOMC Statement: Announced completion of "Operation Twist", expanded QE3 to $85 Billion per month.
• May 22, 2013: In Testimony to Congress, The Economic Outlook, Fed Chairman Ben Bernanke said “If we see continued improvement and we have confidence that that is going to be sustained, then in the next few meetings, we could take a step down in our pace of purchases.” (aka "Taper Tantrum").
• June 19, 2013: In Chairman Bernanke’s Press Conference, Bernanke said "If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year."
• December 18, 2013: FOMC Statement: Announced "tapering" of QE3. Note: QE3 tapered $10 billion per month at each meeting of 2014.
• October 29, 2013: FOMC expected to complete QE3 (next week).
by Bill McBride on 10/22/2014 01:25:00 PM
The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.8% annualized rate) in September. The 16% trimmed-mean Consumer Price Index also rose 0.1% (1.8% 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.Note: The Cleveland Fed has the median CPI details for September here.
Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.1% (1.0% annualized rate) in September. The CPI less food and energy also rose 0.1% (1.7% annualized rate) on a seasonally adjusted basis.
Click on graph for larger image.
This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.2%, the trimmed-mean CPI rose 1.9%, and the CPI less food and energy rose 1.7%. Core PCE is for August and increased just 1.5% year-over-year.
On a monthly basis, median CPI was at 1.8% annualized, trimmed-mean CPI was at 1.8% annualized, and core CPI increased 1.7% annualized.
On a year-over-year basis these measures suggest inflation remains at or below the Fed's target of 2%.
by Bill McBride on 10/22/2014 09:55:00 AM
With the release of the CPI report this morning, we now know the Cost of Living Adjustment (COLA), and the contribution base for 2015.
Currently CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is a discussion from Social Security on the current calculation (1.7% increase) and a list of previous Cost-of-Living Adjustments. Note: this is not the headline CPI-U.
The contribution and benefit base will be $118,500 in 2015.
The National Average Wage Index increased to $44,888.16 in 2013, up 1.28% from $44,321.67 in 2012 (used to calculated contribution base). A very small increase ...
SPECIAL NOTE on CPI-chained: There has been some discussion of switching from CPI-W to CPI-chained for COLA. This will not happen this year, but could happen in the future, and the switch would impact future Cost-of-living adjustments, see: Cost of Living and CPI-Chained.
If CPI-chained was used instead of CPI-W, the COLA increase would be 1.6% instead of 1.7%. CPI-chained would have minimal impact on any one year, but would reduce benefits over time.
by Bill McBride on 10/22/2014 09:01:00 AM
Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.
From AIA: Architecture Billings Index Shows Robust Conditions Ahead for Construction Industry
With all geographic regions and building project sectors showing positive conditions, there continues to be a heightened level of demand for design services signaled in the latest Architecture Billings Index (ABI). As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the September ABI score was 55.2, up from a mark of 53.0 in August. This score reflects an increase in design activity (any score above 50 indicates an increase in billings). The new projects inquiry index was 64.8, following a mark of 62.6 the previous month.Click on graph for larger image.
The AIA has added a new indicator measuring the trends in new design contracts at architecture firms that can provide a strong signal of the direction of future architecture billings. The score for design contracts in August was 56.8.
“Strong demand for apartment buildings and condominiums has been one of the main drivers in helping to keep the design and construction market afloat in recent years,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “There continues to be a healthy market for those types of design projects, but the recently resurgent Institutional sector is leading to broader growth for the entire construction industry.”
• Regional averages: South (55.3) , Midwest (55.1), West (54.2), Northeast (51.0) [three month average]
This graph shows the Architecture Billings Index since 1996. The index was at 55.2 in September, up from 53.0 in August. Anything above 50 indicates expansion in demand for architects' services.
Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.
According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. So the readings over the last year suggest an increase in CRE investment this year and in 2015.