A closer look at inflation in services excluding energy, this accounts for about 60% of the CPI and 75% of the core CPI.

Over the last three months up at a 4.6% annual rate compared to 2.9% annual rate pre-pandemic.

That excess is adding ~1.2pp to annualized core CPI. Image
Overall core services are still below trend--but is moving up more quickly so converging towards/above trend. You could look at that and say that our only inflation problem is goods. Or you could look at that and say we have another shoe yet to drop. Image
Leading candidate for yet-to-drop shoe #1 is housing prices. These are still up relatively slowly for *all* housing as compared to the large increases we're seeing for new leases. All should catch up to new. Image
Potential yet-to-drop shoe #2: pandemic-related prices. We're still in a pandemic. It has been constraining services demand and service prices. If we return to more normal then expect higher prices for airfare, hotels, events, etc. Image
Potential yet-to-drop shoe #3: there is some evidence from @jimstockmetrics and Mark Watson that service prices are more sensitive to labor market slack than overall prices. And labor markets much tighter now than they were a year ago. nber.org/papers/w25987
But who knows. I expect an undoing of the abnormal rotation to reduce inflation the question is how much--is it enough to get us to 2%? Does it leave us at 3%? And if it leaves us at 3% is the Fed OK with that (as I think they should be) or do they feel they need to fight it?
BTW, here is the same multiple period picture for durable goods that I showed you for core services. Image
And repeating the durable goods vs. services comparison over the last 24 months that started this discussion in the first place. Image

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More from @jasonfurman

14 Jan
Wow, people reacted very differently to the rise in COVID in December than they did to previous waves.

Retail sales in December:

Nonstore retailers (mostly online): -8.7%
Food services and drinking places: -0.8%

Overall retail sales fell sharply, 1.9% overall.
The decline in retail sales might actually be a positive sign of a healthy normalization.

The economy has struggled to produce enough goods to match the voracious consumer appetite for them. If goods spending continues to normalize that would be, well, good. Image
To be clear, the chart in the previous tweet was real retail sales. Nominal retail spending remains very high but in it is no longer buying massive amounts more stuff than it used to be.

(Retail sales is mostly goods but does include services like restaurants and bars.) Image
Read 8 tweets
13 Jan
Got new data directly from the BLS! They put together an estimate of U.S. inflation using the European concept for core HICP that is (hopefully) reasonably comparable to what Europe publishes. Here is the picture of the annualized 24-month changes compared. Image
The only published data is for the U.S. overall HICP (you can find it on FRED) but BLS does not publish a core series. There are still various issues with comparability, both in the definition of core and how they're constructed, but they're close. fred.stlouisfed.org/series/CP0000U…
Previously I had been using U.S. core inflation excluding shelter as my rough and ready guess of the most comparable to the Euro area core HICP concept. That guess looks pretty reasonable when compared to the new series BLS produced, at least recently. Image
Read 4 tweets
13 Jan
New @WSJopinion: Four reasons I think inflation could stay high in 2022:

1. Tight labor markets

2. Continued elevated demand and constrained supply

3. Higher expectations

4. Pandemic easing in US and possibly worsening in China

All of these four factors are reasons that inflation in 2022 could be even higher than it was in 2021, something I would put about 20% probability on (speaking about core inflation, excluding volatile food and energy).
In the base case they would still be outweighed by transitory supply chain issues in used cars and demand shifted to goods.

Bottom line: guess of 3-4% inflation in 2022 (towards bottom of range for PCE and top of range for CPI). Wouldn't be surprised by 1% or 6%.
Read 4 tweets
13 Jan
🚨🚨🚨 @uscensusbureau is making a mistaken decision to degrade the extraordinary high frequency labor market data they provide in a way that will both make it harder to track the economy in real time and to do economic research. census.gov/content/dam/Ce…
Not to be overly nationalistic, but thanks to @uscensusbureau US produces monthly micro data on the labor market that is vastly superior to what most or perhaps any other countries produce. Countless analysts rely on it to understand what is going on. This would make that harder.
This issue was flagged by @nick_bunker who pointed to, among other losses, the Atlanta Fed wage tracker & other analysis that adjusts for the changing composition of workers (we used to do this @WhiteHouseCEA & @arindube has been doing a lot of it lately).
Read 4 tweets
12 Jan
Headline CPI was 0.5% for December, core was 0.6%. Cars were a big part of the number (again) but inflation continues to broaden--the "other" excluding cars and pandemic services is high for the third month in a row. Image
Inflation is still almost entirely driven by durable goods not services. Durable goods inflation should come down as supply chains unsnarl but what will happen to services is the big question--is drifting up a little bit lately. Image
One reason to expect services to rise more is that they include shelter--which includes rent and owner's equivalent rent. The CPI is showing a much smaller increase than other measures. They're not comparable but measures of new leases show the future for all leases. Image
Read 7 tweets
9 Jan
My talk: "Why Did (Almost) Nobody See It Coming and What Does That Mean for What’s Next?" from an ASSA inflation session w/ @JonSteinsson @GagnonMacro @jhausma1.

This short🧵summarizes. You can also watch the full discussion. dropbox.com/s/wcnttel1wvgf…
"Why did nobody see it coming" was stolen from the Queen's question after the financial crisis.

In some ways it is less important since inflation is much less bad than the global financial crisis.

In other ways it is more important: inflation *should* be more predictable.
I think we know (almost) everyone missed it. More than a third of the way through the yr private-sector forecasters thought 2.3% and put the odds of 4%+ at 0.5% (it ended up 4.5%). FOMC just as bad. And TIPS breakevens missed the CPI by even more than either of them.
Read 36 tweets

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