The Devil In 12 Year High CPI
Another month of blowout inflation numbers have ramped up the inflation narrative. In the US, CPI for April came in at a whopping 4.2% YoY; the data point handily beat expectations, but does it herald real change?
It is important to underscore that we are still in base effect territory, and will be for another month or two. As such, very large numbers which are better than expected are quite normal. Moreover, given the multiple trillions in fiscal stimulus that the Biden administration has pumped into the US economy, how low could the April CPI number really be? Given these very powerful tailwinds, what would have been surprising and very negative, was if CPI had come in at or below expectations.
That being said, on a MoM basis (unaffected by base effects), CPI shot even higher, from 0.6% in March to 0.8% in April.
While the MoM number is impressive and at its highest since 2009, it is important to remember that the factors behind March’s big rise were still very much present in April. The factors of course being a new round of economic reopening throughout the country, as well as continued supply pressures from Covid disrupted supply chains.
From a longer term perspective, the 4.2% reading looks very bullish on a chart, seemingly moving out of the downtrend that has been in place over the last decade or so.
This does reinforce the impression of inflation running away, just as almost everyone in the markets is claiming. While it is possible that the trend in consumer prices has turned, and we are currently witnessing the start of a new inflationary cycle, it is important not to get ahead of ourselves.
As long as supply chains around the world continue to struggle to catch up with demand from economies reopening again, prices will remain elevated, and may continue to trend higher.
While it is difficult to ascertain how much of current price increases are due to supply chain issues, and how much is due to returning demand, we do know that the labor market is nowhere near being back to what it was. Weak payrolls data for April, together with the damage wreaked on American workers by Covid highlight this.
Consequently, the forces that lead to sustainable increases in consumer spending, and thus prices, simply are not as strong as they were before Covid. Furthermore, if the April jobs report is not a one off disappointment, and labor market data continues to be poor, then who knows when consumer demand/spending can recover in a broad and sustainable way?
Ultimately, that’s what everyone is actually looking for – a broad and sustainable recovery in consumer demand that leads to the “good kind” of inflation. High or low inflation readings are simply ways for market folk to figure out how far away we are from reaching that point. As such, a single CPI reading, no matter how record breaking, cannot possibly tell the full story. What will help to tell the full story is context, and time. Which is a fancy way of saying we have to wait and see.
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