Below is a summary of my post-CPI tweets.

• 5 minutes to CPI. Consensus is for core to barely round to 0.2%, and for y/y core to remain at a soft 2.3%
• I have the “over” there, but the “under” against my friend who thinks it’s gonna be 0.24%.
• Core CPI +0.09%, y/y drops to 2.20%.
• Waiting for the breakdown to dig deeper. Housing accelerated y/y, as did Medical care, but Apparel, Rec, Educ/comm all lower.
• …Housing and Medical care are the big longer-term concerns so the internals might not be as weak as the headline. Taking a look now.
• Meanwhile Dudley on the tape saying “probably don’t have to do a lot of tightening over time.” Echoes Williams. When doves cry.
• At the same time Dudley says rate hike is possible in September. Sure, anything is possible. But not with core printing 0.1% m/m.
• ..in Housing, Primary Rents fell to 3.77% from 3.81% y/y. OER rose to 3.26% vs 3.25%, continuing flat patterns.
• Those are the biggest parts of housing. Lodging away from home plunged y/y. Where did the rise in housing come from? Household energy.
• HH energy -1.37% y/y vs -3.02%. That’s 3.8% of the CPI, but not in core obviously. So housing ex-energy was basically flat.
• Overall Medical Care category rose to 3.99% from 3.65% and 3.17% the month before that. Jumps in every category:
• Drugs 3.77% (vs 3.40%). Equipment/supplies 0.1% (-0.62%). Prof Svcs 2.86% (2.60%). Hospital 4.41% (4.12%). Health Ins 7.78% (7.10%)
• Large jumps everywhere in Medical Care. *Discuss.*
• Apparel still rising y/y, at 0.35%, but won’t really take off until the dollar declines.
• Overall, core services +3.1% (was 3.2%) and core goods -0.6% (unch).
• Popular number is core ex-housing. 1.36% y/y vs 1.37%.
• So overall, despite the weak m/m core number, the big trends remain in place. Housing flat to higher. Medical Care starting to ramp up.
• A broad array of volatile components dragged m/m CPI down. But 59% of the basket is still accelerating faster than 3%.
• Biggest monthly falls: motor fuel, car and truck rental, public transp, lodging away from home, and misc pers goods. All <-20% m/m
• Only category over 20% annualized m/m increase was Infants and toddler’s apparel.
• These last few facts mean that MEDIAN inflation, a better measure of inflation, will be up 0.24% or so m/m. 2.48% y/y.
• Ugly pic #1: Health Insurance y/y

• Ugly picture #2: medicinal drugs y/y.

• Ugly picture the worst: Medical Care overall, y/y

• Owners’ Equiv Rent, largest part of CPI. Certainly high and stable. Maybe tapering? But at 3.3%! Ugly or no?

• FWIW our forecast is for OER to rise a little bit further, but less dramatically unless core ex-housing starts to move.
• I’m not sure it’s comforting to have rents up “only” 3-4% in context of rising med care. In any event: core ain’t falling soon.
• note that in August 2015, core was +0.12% m/m. So we’ll see some re-acceleration (and possible catch-up) next month.
• I actually think there’s a chance for an 0.3% print next month. which would make the FOMC more interesting.
• Right now, it’s not interesting. With m/m core at 0.09% and 3 quarters of 1% GDP, Fed not tightening in Sept.
• Thanks for all the new follows and the re-tweets. Good time to mention a couple of things:
• I’m thrilled to be on “What’d You Miss?” on Bloomberg TV at 3:30ET today. With @scarletfu @thestalwart and @OJRenick

So, while PPI is not usually much of a predictor of CPI, in this case it gave early warning that we were about to see a weak print from the more-important indicator. But that weakness came from a couple of smaller categories. I have shown this chart a number of times before, but I think it’s especially instructive this time. Compare the distribution of price changes in categories (by the weight in the category) this month…

To the same distribution from last October.

Note that the left tail, which holds the laggards, has more weight this time. There is not quite as much weight in the deep deflation tail, but there are more 0% and 0.5% categories. Yes, there is also one really big increase on the right although it still doesn’t add up to much. The biggest piece of the upper tail is Health Insurance – which as you can tell from the chart above is fairly persistent. In short, I think there’s a better chance of the lower tail reverting to the mode of the distribution than there is of the upper tail doing the same. (This is why Median CPI is a better measure).

The bottom line for markets in the near-term is that nothing about this number scares policymakers. While Dudley says that September is still on the table for an FOMC tightening, the reality is that the data will present them with no urgency – even if, as I think likely, next month’s core CPI corrects for this month’s weakness. And Williams’ ridiculous paper gives them academic cover to ignore the fact that median CPI is at 2.5% and likely will continue to rise. Moreover, LIBOR has been rising because of changes in money market regulations, so FOMC members can argue that financial conditions are tightening automatically. In short, it is very unlikely in my opinion that the Fed hikes rates in September. Or November. Or December.

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