Inflation Spikes in April - May 17, 2021

The U.S. BLS reported last week that the Consumer Price Index (CPI) jumped 0.8% in April vs March. The so-called core CPI, which excludes food and energy, rose 0.9% in April, the fastest monthly pace in 40 years. 

Economists once again missed by a wide mark. Per a survey of analysts by Investor’s Business Daily, the CPI was expected to rise a modest 0.2%. The core CPI was forecast to rise 0.3%.

Notably, energy prices declined, but other categories rose sharply. Used cars surged 10.0%, airline fares jumped 10.2%, rental cars rose 16.2%, and auto insurance gained 2.5%.

Some of the increase is simply catchup as the economy reopens, such as air fares. But other increases suggest that inflation is starting to run a little hotter than what we’ve become accustomed over the last decade.

What’s going on? Mostly, we are beginning to see an imbalance in supply and demand.

We have learned that huge cash infusions into the economy via government stimulus will boost demand. We also see that the benefits have been distributed unevenly, with cash being funneled into consumer goods, while services have lagged.

Yet, supply has been slower to rebound. A May 13th story in the Wall Street Journal, Empty Lots, Angry Customers: Semiconductor Crisis (Shortages) Throws Wrench into Car Business, sums up what’s happening in the auto industry.

Or, here is another take in a May 11th CNBC feature: U.S. Faces Major Shortages in Everything from Labor to Semiconductors, Lumber, and Packaging Material.

The National Association of Homebuilders said last month that lumber shortages are leading to skyrocketing lumber prices, adding an average of $36,000 to the cost of new home over the last year.

Furthermore, the U.S. BLS reported that job openings are at record high of 8.1 million as of March. Higher wages that might be needed to entice workers could get tacked on to retail prices.

Yet, the Federal Reserve is taking recent news in stride. It wants to see inflation run a little hotter after coming up shy of its 2% target for much of the last decade.

The Fed insists it won’t raise interest rates until the economy reaches what it believes is full employment. Additionally, much more government spending is probably on the way.

1970s-style inflation?

Probably not, but inflation seems poised to rise.

The money supply surged last year, while supply chain problems and shortages of some goods are supporting prices.

Fed officials believe the recent spike in prices is “transitory.” That may be the case. But inflation expectations are rising, as evidenced by various surveys.

The Fed could dampen inflation expectations with a surprise rate hike or a reduction in its bond purchases. But that is very unlikely to happen in the short term.

Government spending and super easy money argue for inflation. However, longer-term disinflationary trends, i.e., demographic trends and globalization, remain in place.