drive inflation higher in April
The consumer price index for urban consumers rose 0.8% in April, much higher than the consensus forecast of 0.2%. The upside surprise was in core CPI: CPI excluding food and energy rose 0.9% on the month versus 0.3% expected. Energy prices fell 0.1% on the month, while food prices rose 0.4%.
April’s monthly jump in the CPI was boosted by a 10% surge in prices of used cars and trucks, which the Bureau of Labor Statistics noted was “the largest 1-month increase since the series began in 1953, and it accounted for over a third of the seasonally adjusted all items increase.” This drove the largest monthly increase in CPI excluding food and energy since April 1982. In addition to used cars and trucks, most other components of core CPI rose in April.
From a year earlier, CPI rose to 4.2% after 2.6% in March, while CPI excluding food and energy rose 3.0% in the same terms after 1.6% in March. Year-over-year increases in many components of the CPI were extremely high, reflecting both price increases since the fourth quarter of last year as well as the comparison against an economy that was in free fall in the spring of 2020 with prices outright declining.
Inflation accelerated in late 2020 and early 2021 for several reasons. Foremost is the good news that the economy is recovering from the downturn of 2020 as more Americans are vaccinated, stimulus fuels consumer spending, and businesses gear up for the recovery. Reopening expectations have fueled a jump in energy prices with retail gas prices up 50% from a year earlier, fuel oil up 37%, and energy services (utilities) up 5%. Fiscal and monetary stimulus have caused consumer demand to recover much faster than the production capacity of the economy. Consumers are spending but businesses who laid off workers in 2020 are struggling to staff back up in 2021; the National Federal of Independent Business’s Small Business Jobs Hard to Fill survey showed the toughest hiring market for small businesses (i.e. best market for job seekers) since their survey began in the early 1990s. Health concerns, more generous unemployment benefits, and caregiving responsibilities have slowed the return of workers who lost jobs in 2020 to the labor market.
The pandemic has also caused sudden shifts in consumer behavior that is translating into inflation as businesses struggle to catch up with changing demand. The surge in the price of used vehicles, up 10% on the month and 21% on the year, is the most obvious example. Stimulus checks funded down payments for many vehicle buyers, and the Fed has kept interest rates extremely low, making car loans cheap. The pandemic has made commuters leery of public transportation. Households who have moved from downtowns to the suburbs are buying cars to get around their new neighborhoods.
Supply chain dislocations caused by the pandemic are worsening inflation pressures. The pandemic has made business much harder to do; business surveys have reported the worst supplier delivery delays on record in recent months. With supply chains more unreliable, manufacturers, wholesalers, and retailers are scrambling to add buffers to their inventories; when everyone does this at once, supply chain problems get even worse. Notably, the global semiconductor shortage has forced many auto manufacturers to idle plants, reducing new car inventories on dealer lots and contributing to the upward pressure on prices of used cars and trucks.
April’s surging inflation will definitely get the Fed’s attention. Inflation was already headed higher in year-over-year terms prior to this release because of the base comparison against early 2020. But April’s monthly jump in prices is much more than expected, and will likely cause total and core inflation to overshoot the Fed’s target for the rest of this year. The Fed targets inflation as measured by the average price of all goods and services bought by consumers, the personal consumption expenditures price deflator, which tends to run a bit below CPI. In their March economic projections, the Fed forecast for PCE deflator inflation to rise 2.4% in the fourth quarter of 2021 from the fourth quarter of 2020. They will very likely revise up that projection at the June Open Market Committee meeting. But they will wait to see more progress in the job market before considering a change in monetary policy, especially after April’s disappointing jobs report.
The stimulus checks, job market dislocations, and supply chain issues caused by the pandemic are short-term drivers of inflation, and the Fed will look past them in setting interest rates. But there are ways to see how this temporary inflation could turn more permanent: Higher wages employers are using to attract workers could be inflationary over time (although this hasn’t been an issue in the US for decades); buoyant consumer demand could fuel a faster recovery than expected; or the upward price shocks could fuel higher inflation expectations. These upside risks to inflation have caught financial market’s attention today, pushing equity futures lower ahead of the market opening today and pushing the yield on the 10-year government note up 5 basis points to 1.67%.
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