U.S. CPI inflation soars again in April…we’re not surprised

U.S. CPI inflation soars again in April…we’re not surprised

*The CPI jumped 0.8% in April, lifting its yr/yr rise to 4.2% and the core CPI excluding food and energy surged 0.9%, lifting its yr/yr to 3%, its highest level since 1995 (Charts 1 and 2). The jump in the yr/yr CPI reflects in large part the base adjustment from the decline in April 2020, but it is consistent with anecdotal evidence of widespread increases in consumer prices and strongly indicates that inflation pressures are mounting.

*We have been arguing that inflation pressures will mount and persist, whereas the Fed has been arguing that the rise in inflation is temporary, so we are not surprised (Strong US growth, inflation and the Fed’s challenges, February 11, 2021 and Critical issues as the U.S. economy reopens, May 5, 2021). We expect inflation will rise again in May, as more businesses take advantage of the stronger aggregate demand and raise product prices to offset significant increases in production costs.

*Price increases were fairly widespread. Prices of services less energy rose 0.4%, while energy prices fell 0.1%. Prices of durables rose 3.5%, boosting their yr/yr increase to 7.3%. Consistent with anecdotal evidence, prices of used motor vehicles jumped 10%. Prices of nondurables fell 0.3%, but are up 6.5% yr/yr, reflecting price increases in energy and non-energy items.

*Of note, prices of services excluding shelter rose 1.0%, lifting their yr/yr rise to 3.2%. The largest component, owner equivalent rental value (OER), rose only 0.2%, maintaining its yr/yr rise at 2%, despite soaring home prices (up 11% yr/yr) Chart 3. It is expected to accelerate.

The issue of whether the rise in inflation is temporary or more persistent depends critically on the trajectory of aggregate demand. If it remains strong after the economy reopens, as we project, based on the unprecedented monetary and fiscal stimulus, inflation pressures will mount as costs of production will continue to rise and businesses will have flexibility to raise product prices. The Fed’s ability to manage inflationary expectations will be tested.

How will the Fed respond? The Fed’s perspective that inflation will remain modest is based nearly entirely on the post-financial crisis period, which seems very narrow and misplaced (“The Fed in the Sand as Inflation Threatens” , April 28, 2021) The Fed is already behind the curve and its public statements that inflation is temporary and relatively dismissive of the risks of higher inflation seems inconsistent with economic realities. We expect data in the coming months to force the Fed to change its tune and in late Summer, to signal that it will begin to taper its asset purchases.

Chart 1. CPI-U: All Items less Food and Energy

Chart 2. CPI-U: All Items

Chart 3. CPI-U: Owners’ equivalent rent of residences

Mickey Levy, mickey.levy@berenberg-us.com

Member FINRA & SIPC
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