THE UNITED STATES ECONOMIC MONITOR
IAN SHEPHERDSON, CHIEF ECONOMIST
One strong core CPI print does not make a trend,
especially after three soft readings…
…But the details show that prices are starting to
rebound in the sectors hit hardest by Covid.
The sharp slowdown in rents—the biggest core CPI
component, by far—is reversing.
Core Inflation Lifted by Gains in
Covid-Crushed Components
No single economic report offers conclusive evidence
of anything. So, if you want to ignore the March CPI
report on the grounds that the 0.34% jump in the core
index was just noise—a rebound after three straight soft
readings, averaging jut 0.06%—we can't promise you
that this would be a mistake. Equally, we can't be sure
that the next few months will bring readings more like the
March numbers. It's possible that the true trend is, and
will remain, somewhere in the middle. In that case, the
core CPI will rise by about 0.2% per month on average,
dashing the forecasts of both die-hard deflationists
and inflationists, and—most importantly—leaving the
Fed in the happy position of not having to do anything.
Treasury yields would meander around their current
range, leaving equity valuations largely untroubled.
The details of the March report, however, suggest
to us that most of the risk over the next few months
THE REBOUND IN CPI RENTS IS CLEAR, AND WILL PERSIST
Weighted average primary and owners’ equivalent rents, m/m%
Three-month moving average, %
Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21
© 2021 Pantheon Macroeconomics | 400 Columbus Avenue, Suite 10S, Valhalla, NY 10595, United States | All rights reserved | No secondary distribution without express permission.
APRIL 14, 2021
is to the upside, relative to benign 0.2% per month
scenario. Three different, but connected, stories are set
to play out here. First, the Covid squeeze on rents—which
account for 41% of the core CPI, is ending. Solid back-
to-back gains in rents mark a clear break to the upside,
as our first chart shows, and plenty of other evidence
suggests this is no fluke.
The rental vacancy rate is very low, while demand
appears to be rebounding very strongly, and landlords
are seeking the biggest increase in rents ever recorded
in the Census Department's quarterly survey, which
extends back to 1994. We fully expect rents to accelerate
over the remainder of this year, with the year-over-year
rate likely to end the year at about 4%, a pace last seen
in early 2007.
Second, some of the non-rent core CPI components
which Covid crushed, mostly in the services sector, are
now showing signs of life, but remain depressed relative
to their pre-Covid levels. The lodging away from home
index, for example, jumped by 3.8% month-to-month in
March, but it remains a huge 11.7% below its February
2020 level. We know from industry data that hotel
occupancy and room rates are now rising strongly, as
our next chart shows.
Airline fares are even more depressed, down 25% from
February 2020, having risen only marginally from last
spring's low. But passenger numbers are soaring, and
we expect airlines to seek to pass on the surge in jetfuel
prices over the next few months. Finally, auto insurance
HOTEL ROOM RATES ARE REBOUNDING TOO
U.S. hotels average daily rate, $
140
0.35
130
0.30
120
0.25
110
0.20
100
0.15
90
0.10 80
0.05 70
Source: STR, Inc.
0.00 60
Apr 21 29 Feb 25 Apr 20 Jun 15 Aug 10 Oct 05 Dec 30 Jan 27 Mar
THE UNITED STATES ECONOMIC MONITOR APRIL 14, 2021
WWW.PANTHEONMACRO.COM

prices are still down 2.5% year-over-year, even after a

CPI USED VEHICLE PRICES LOOK SET TO JUMP
12.8% annualized jump in the first quarter. Insurance Manheim auction auto prices m/m%, advanced two months
prices tend to lead GDP growth, so we have to expect a CPI used cars and trucks m/m%
further sustained increase as driving activity increases, 12
10 6
prompted by people returning to commuting. 8
4
6
It's clear from our next chart that Covid-hit CPI 4 2
2
components—we're also including apparel, given the 0 0
-2
continued constraints on in-person shopping in some -4
-2
-6 -4
states—have plenty of room to rise as the economy -8 -6
re-opens. Apparel prices dipped in March but rose -10
-12 -8
at a 10.1% annualized rate in the first quarter. The Jan 19 Jul 19 Jan 20 Jul 20 Jan 21 Jul 21

index remains 3.9% below the pre-Covid level but the

combination of rebounding demand over the next few
months, and the lagged effect of the 8% drop in the
dollar since the pandemic began, means that apparel
prices are set to increase significantly.
COVID-HIT COMPONENTS HAVE FURTHER TO RISE
CPI apparel, February 2020 = 100
Airline fares
Lodging away from home
Motor vehicle insurance
Feb 20 Apr Jun Aug Oct Dec
Finally, inflation already is high and rising in
components which have seen strong demand during
the pandemic. Some of this is not sustainable—major
household appliance prices rose 14.5% in the year to
March, but demand will fade somewhat when people
are again able to spend disposable cash on services like
travel and entertainment—but we expect some of the
lifting the year-over-year rate to 2.8% by the end of
the year. This alone will not scare the Fed, given their
constant refrain that they want inflation to rise after
years of undershooting the target. But if the increase
in inflation seems likely to progress further, and wage
pressures are starting to emerge, it will be a different
story, and under those conditions markets would not buy
110 the idea that the upturn is merely "transitory". No one
105 will want to be the last investor clinging to the idea that
100
the Fed will be able to hold its line.
95
To be clear, wage risks are not today's story, given
90
85
that employment remains nearly 12M lower than we
80 would have expected in the absence of Covid. But the
75 NFIB survey clearly indicates that small business owners
70 view the labor market as increasingly tight, and all the
Feb 21 Apr
labor indicators in the survey have made substantial
partial recoveries, at least, from their Covid lows. This
is very different from the post-2008 wasteland, and it
suggests to us that labor cost pressures are likely to build
much more quickly in this cycle than the last.
NO WAGE THREAT YET, BUT WHAT HAPPENS AS GROWTH SURGES?
NFIB expecting to raise compensation, advanced nine months (Left)
ECI wages and salaries, y/y% (Right)
30 5

demand to persist for some time. The used car market 25

4
likely will remain hot because some people will seek 20
to mitigate Covid infection risk even after vaccination.
15 3
Auction prices for used cars have risen by an astonishing
10
8.9% over the past three months, but this has only just 2
5
begun to filter into the CPI, with used auto prices up 0.5%
in March, after four straight hefty declines. The next few 0 1
00 01 02 03 04 05 06 07 08 09 10
months likely will see substantial increases.
Our base case, then, is that the core CPI index rises
Ian Shepherdson +1 914 610 3830
by about 0.25% per month over the next nine months,
ian@pantheonmacro.com
© 2021 Pantheon Macroeconomics | 400 Columbus Avenue, Suite 10S, Valhalla, NY 10595, United States | All rights reserved | No secondary distribution without express permission.
THE UNITED STATES ECONOMIC MONITOR APRIL 14, 2021
WWW.PANTHEONMACRO.COM

THIS WEEK IN BRIEF THIS WEEK’S FUNDING

Note: “D” prefix indicates Datanotes for these releases. Monday 12 Auction: $57B 3-month, $54B 6-month bills
Auction: $58B 3-year notes (settles Apr. 15)
Monday, April 12
Auction: $38B 10-year notes (settles Apr. 15)
• Treasury Budget (3)/14:00 EDT
The deficit surged to $658B from $119B in March last year, thanks Tuesday 13 Announcement: four-week bills, eight-week bills
largely to the one-time stimulus payments under the latest Covid bill. Auction: $40B 42-day bills (settles Apr. 15)
Tuesday, April 13 Auction: $24B 30-year bonds (settles Apr. 15)
• D: NFIB Small Business Survey (3)/6:00 EDT Wednesday 14 Nothing
Improving sentiment after the passage of the American Rescue Plan
Act and the gradual reopening of the economy lifted the headline Thursday 15 Announcement: 3-month, 6-month bills (Apr. 19)
index to 98.2 from 95.8, but capex plans slipped, disappointingly. Announcement: 1-year bills (Apr. 20)
• D: Consumer Prices (3)/8:30 EDT Announcement: 20-year bonds (Apr. 21)
The headline CPI jumped 0.6%, propelled by surging gas prices. The
core rose 0.3%, after three straight soft readings, led by big rebounds
Announcement: 5-year TIPS (Apr. 22)
in lodging costs and vehicle insurance, and smaller increases in Auction: four-week bills, eight-week bills
hospital charges, airline fares and apparel.
Friday 16 Nothing
• Redbook Chain Store Sales (4/10)/9.00 EDT
Same-store sales growth jumped to 13.2% year-over-year from last
week's 10.6%, driven by stimulus spending and base effects.

Wednesday, April 14
PANTHEON’S FINANCIAL FORECASTS
• Mortgage Applications (4/9)/7:00 EDT
Seasonal factors point to rising purchase applications in April but the End-month:
underlying trend seems still to be softening. Last week, the purchase
4:00pm Tues. Jun Sep Dec Mar
index unexpectedly fell by 4.6% to 283.8.
• Import Prices (3)/8:30 EDT Fed funds target 0-to-¼ 0-to-¼ 0-to-¼ 0-to-¼ 0-to-¼
We think import prices rose 0.8%, driven mostly by higher oil prices,
2-yr 0.16 0.15 0.20 0.25 0.30
though prices for non-energy imports are rising. Consensus: 0.9%
• Federal Reserve Beige Book /14:00 EDT 10-yr 1.62 1.90 2.00 2.00 2.00
Expect more reports of reopening boosting activity, but with tight
supply chains lifting prices in manufacturing. 30-yr 2.30 2.50 2.60 2.60 2.60
Curve 10-2 146 175 180 175 175
Thursday, April 15
• D: Jobless Claims (4/10)/8:30 EDT Curve 30-2 214 235 240 235 235
Claims likely will dip to about 725K from 744K last week. Unfavorable S&P 500 4,142 4,050 4,050 4,050 4,050
seasonals will prevent a bigger decline, but the trend is set to fall
sharply over the next couple months. Consensus: 700K. Dollar/Yen 109.0 105 106 107 108
• D: Retail Sales (3)/8:30 EDT
Euro/Dollar 1.20 1.17 1.15 1.15 1.15
Stimulus-driven spending and a rebound from the February storm
means that we expect a 9% increase in total sales, with sales ex-autos Sterling/Dollar 1.38 1.35 1.35 1.35 1.35
up 9.5% and the control measure up 8%. Consensus: Total sales
5.5%, ex-autos 4.8%, control 7.0%.
• D: Philadelphia Fed Survey (4)/8:30 EDT
We think the headline index will correct to about 35—still very high—
after the leap to 51.8, a 38-year high, in March. Consensus: 40.0.
PANTHEON’S ECONOMIC FORECASTS
• D: Industrial Production (3)/9:15 EDT
We expect a hefty 4% rebound in manufacturing production,
rebounding from the February storm hit, but the increase in total GDP Q2 -31.7% 2018 year: 3.0%
production will be smaller, about 3%, thanks to a big drop in utility
Q3 33.4% 2019 year: 2.2%
output. Consensus: Total production 2.5%, manufacturing 4.0%.
• Business Inventories (2)/10:00 EDT Q4 third 4.3% 2020 year: -3.5%
Total inventories likely rose about 0.5%; some of the increase was
Q1 forecast 6% 2021 year: 7.0%
involuntary, due to the mid-month storm. Consensus: 0.5%.
• D: NAHB Homebuilder Survey (4)/10:00 EDT Q2 forecast 7% 2022 year: 4.0%
The plunge in mortgage demand means we expect a second straight
Q3 forecast 14%
decline to about 80 from 82. Consensus: 84.0.

Friday, April 16
• D: Housing Starts (3)/8:30 EDT CPI February: 0.4% (1.7% y/y); core 0.1% (1.3% y/y)
Starts likely rebounded strongly after the massive weather hit in June 2021 forecast: 2.5% y/y; core 2.3% y/y
February; we look for about 1,650K, up from 1,558K in February.
Permits likely rose too, but are under pressure from the weakening December 2021 forecast: 2.2% y/y; core 2.1% y/y
trend in new home sales. We expect to see total permits at 1,750K,
up from 1,720K. Consensus: Starts 1,600K, permits 1,750K.
• D: Univ. of Mich. Consumer Sentiment (4p)/10:00 EDT Unemployment: June 2021: 5.0%, December 2021: 4.3%.
The surge in the Conference Board's index suggests that the Michigan
index will rise to about 90 from 84.9. Consensus: 89.0. Federal budget: FY 21 forecast: -$4,000B (20% of GDP)

© 2021 Pantheon Macroeconomics | 400 Columbus Avenue, Suite 10S, Valhalla, NY 10595, United States | All rights reserved | No secondary distribution without express permission.