'Transitory' being put to the test
April’s unexpectedly large jump in CPI adds to worries higher inflation may stick around.
The markets knew this morning’s report on April consumer prices wasn’t going to be pretty—but even it was surprised how bad it was. While base effects were largely flagged, the big surprise was the 0.9% monthly jump in core CPI (which excludes energy and food and is viewed as the better baseline read on price trends)—the biggest increase since 1982! If the rate of inflation observed thus far in 2021 continues for the remainder of the year—a prospect the Federal Reserve believes is unlikely while the market isn’t so sure—year-over-year core CPI would exceed 4% by year-end, a level unseen in decades.
It is worth noting, however, that this was just one month and that soaring used-car prices accounted for nearly a third of the month-over-month increase—a likely transitory item due to lack of supply and the ongoing semiconductor shortage. We do think patience is warranted as we knew April would be bad relative to negative prints a year ago. The next few months likely will run well above historical norms, too. Two things to watch: whether those coming increases moderate off April’s outsized surprise and the breakdown between sticky versus flexible prices—that is, price increases that are likely to remain elevated versus those that suggest one-off trends such as used cars.
Whatever the outcome, the risk level for higher inflation arguably moved higher this morning, and with it, the likelihood that volatility in the markets will be higher, too. As we observe price trends in the coming weeks and months, we also will look for any changes in tone coming from the Fed. Clearly, though, reports like today are likely to put the Fed’s “transitory” argument, and commitment to a zero-rate policy, to the test.