Inflation—Good News, Bad News

The U.S. Bureau of Labor Statistics (BLS) reported on inflation last week with the release of the April Consumer Price Index (CPI). We’ll get into the headline numbers in a moment, but the report can be summarized with two graphs, which suggest both good news and bad news.

First, the good news. Early on, inflation was driven by a surge in the cost of consumer goods. As Figure 1 illustrates, prices jumped 0.8% in April 2021. But the recent trend is encouraging.

Although used vehicles are not included in Figure 1 (and prices remain elevated), used cars have fallen over the last three months, per U.S. BLS data.

While we can be cautiously optimistic that the rate of inflation for consumer goods s slowing, the same can’t be said for the broad-based service sector.

As Figure 2 illustrates, the cost of services is accelerating. Services rose almost 0.8% last month (blue line). If rent, which has been rising, is removed, services jumped nearly 1.1% (red line).

Further, energy prices remain a problem, and food continues to rise.

Overall, the U.S. BLS reported the CPI slowed from an annual pace of 8.5% in March to 8.3% in April, and the core CPI, which excludes food and energy, slowed from 6.5% annually to 6.2%.

Yet, both were disappointing, as they remain high and overshot expectations, per Bloomberg.

For now, the Fed has its work cut out as they attempt to slow an overheated economy and rein in inflation, without tipping the economy into a recession.

As Fed Chief Jerome Powell said last week in an interview with Marketplace, “Whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.”