Inflation is coming, inflation is coming!

Last month I wrote about the distinction between long-term secular inflation and shorter-term cyclical inflation

It has been clear for several months that we are in the middle of a cyclical rise in inflation

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The full thread can be reviewed here:



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Today's PPI report should have been expected to surprise to the upside as the leading indicators of inflation have been screaming to the upside for months!

Here is the ISM prices paid index, cumulated into a growth rate

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Industrial commodity prices have also seen a major acceleration for months.

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So today's PPI report was in line with the leads, suggesting that we have a cyclical upturn in inflation that is * primarily concentrated in the manufacturing sector *

This is a key point.

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Core PPI showed an increase in year over year terms to nearly 2.5%.

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To be very clear, this cyclical upturn in inflation will continue for the next several months and should not be expected to fall apart imminently

This does not mean the secular disinflationary trend is over. We have had 4-5 of these upturns since 2010. They happen. They fade

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Sticking with the trend of a general manufacturing-based upturn, what else surprised to the upside (shouldn't have been a surprise)...industrial production.

IP growth increased to -1.83% y/y

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Industrial production for manufacturing specifically is almost back to positive growth on a year over year basis.

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Should we expect the manufacturing-based growth and inflation upturn to continue?

Yes.

But remember to differentiate cyclical for secular.

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We're not changing this trend anytime soon.

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TLDR:

Play the cyclical trend. Don't lose sight of the long-term fundamentals.

12/12

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More from @EPBResearch

17 Feb
Core Retail Sales:
Core Retail Sales Year over Year:
"Real" Core Retail Sales:
Read 4 tweets
10 Feb
Quick thread on the recent CPI report

There is a battle between long-term (secular) disinflation and a short-term cyclical rise in industrial-based inflation

The market is desperately hoping the cyclical inflation wins, and it still has the edge for now, but not this month

1/
⚠️ Warning ⚠️

In the next few months, the base effect will boost inflation big time and it will be consistent with the cyclical upturn in inflation, but the CPI growth will fade after the easiest comp.

That aside...

2/
Headline CPI edged slightly higher in year over year growth rate terms but remains stubbornly low, and way too low based on breakeven rates.

See recent thread on DKW Model:

3/
Read 13 tweets
10 Feb
What factors are driving Treasury yields higher?

Is it inflation, growth, or something else?

While the DKW model is imperfect, it provides some context around which factors are driving Treasury rates higher.

The DKW model was recently updated for EoM January.

(Thread)

1/
To start, as I have commented many times in the past, the economy is in a clear cyclical upturn, so we should expect the vector or direction in both growth expectations and inflation expectations to move higher.

2/
However, embedded within a 10-year rate is 10-year assumptions, not easily moved like Y/Y CPI or growth. These are long-term, slow-moving averages.

3/
Read 12 tweets
8 Feb
How high will bond yields rise?

2.0%? 3.0%?

This isn't about yield curve control.

This is about when higher yields start to change the vector or direction of economic growth.

Some food for thought...

(Thread)

1/
Over the summer (July) we started to note a rise in cyclical inflation indicators and noted it was prudent to hedge a rise in inflation.

My process separates long-term (secular) trends and multi-quarter/year (cyclical) trends.

We have a cyclical upturn on our hands.

2/
This is not new or unique.

In fact, since 2010, we have had four major cyclical upturns in economic growth.

This is the fifth.

I don't use any technical analysis (not in my process).

However, we can use the last four cyclical upturns for clues.

3/
Read 12 tweets
28 Jan
Quick Breakdown of the GDP Report:

Nominal GDP growth increased to -1.2% on a year over year basis.

This increase in nominal growth is clearly very expected.

1/
Real GDP growth increased just a touch, from -2.85% to -2.45% on a year over year basis.

The gains are predictably slowing (Zarnowitz Rule) but the y/y growth will look huge in Q2 due to the base.

2/
Consumption as a % of GDP actually declined in Q4.

Consumption fell to 67% of total GDP, basically flat since the 2008 crisis.

3/
Read 13 tweets
13 Jan
I have been discussing the trends in inflation lately.

Today's report showed more of the same.

Inflation is coming from the industrial upturn, concentrated in the goods sector while the services sector is showing declining rates of inflation.

1/
Headline inflation ticked up slightly and is mostly a balancing act between rising goods inflation and falling services inflation.

2/
Goods inflation continues to rise, jumping to nearly 4% on a year over year basis.

Goods inflation (and industrial commodities) are rising due to manufacturing backlogs caused by shutdowns and the overall shift to at-home goods consumption and away from services consumption.

3/
Read 5 tweets

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