- Consumer price index posts largest annual gain since September 2008…
- Fed maintains stance that rising inflation is temporary…
- Rate hike fears grip Wall Street…
U.S. inflation pressures have soared to the highest level in nearly 13 years.
The Labor Department reported the consumer price index (CPI) rose 0.8% monthly in April and surged 4.2% year-over-year.
That was the fastest annual price growth since September 2008 and higher than economists’ expectations for a year-over-year change of around 3.5%.
The core CPI — which excludes food and energy prices — saw an even steeper monthly increase of 0.9% and rose 3% compared to April 2020.
Energy prices saw the largest annual increase in April, rising 25.1% year-over-year while gas prices surged 49.6%.
Market Reaction
Wall Street fell following the release of the inflation data with all three major indexes opening in the red.
At writing, the Dow Jones was down more than 400 points and 1.2%, the S&P was trading 1.5% lower, and the NASDAQ had plunged more than 2%.
The drop comes as investors and traders grow more concerned that rising inflation pressures will force the Federal Reserve to tighten its monetary policy.
Treasury yields also shot higher following the release of the data.
What’s Causing Such High Inflation?
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Inflation pressures have spiked as the economy continues to reopen and consumer activity is far outpacing the lack of spending seen in the spring of 2020 amid the pandemic — this is what the Fed means when they say “base effects”.
Supply chain issues have arisen with the U.S. reopening its economy faster than global trading partners.
As demand rises for products but supply fails to keep up, prices ultimately rise.
One example is lumber, which has seen a 124% price increase just in 2021 so far.
Demand for building materials like lumber has surged during the pandemic as more Americans choose to build new homes amid a supply shortage of existing homes for sale.
But lumber suppliers have failed to keep up with that demand, ultimately sending prices higher.
Other material costs have also surged with steel prices hitting a new record high and copper prices rising 36% so far this year.
And government stimulus measures — like stimulus checks and the Federal Reserve’s bond-buying program — have also been blamed for making the inflation issue worse by pumping more cash into the economy.
But determining the long-term impact of the current inflationary trends depends on who you ask.
Temporary or Long-term?
More economists and big Wall Street executives are sounding the alarm about inflation becoming an issue that will need to be mitigated by the Central Bank.
But most Fed officials continue to downplay the trend as transitory and are focusing on a long-run inflation goal.
Fed Chair Jerome Powell has not budged from the “base effects” explanation.
In his April 28 press conference, Powell said, “Twelve-month measures of inflation are likely to move well above 2 percent over the next few months as the very low inflation readings recorded in March and April of last year drop out of the calculation.”
Powell estimated those effects would “contribute about one percentage point to headline inflation and about 7/10 of a percentage point to core inflation in April and May.”
So let’s subtract his estimated base effects impact from the current numbers.
If you subtract one percentage point from the headline CPI rate in April, you still have annual inflation of 3.2%. And if you take 7/10 of a percentage point off the core number, you’re left with 2.3%.
Both of those numbers are still above the Fed’s target of 2%.
But the Central Bank has vowed to focus on longer-run inflation while they prioritize recovery in the labor market.
The Fed is likely to accept higher inflation pressures in the short term to average 2% over the next few years.
The April jobs report showed a rocky recovery in the labor market and prompted more concern about wage inflation.
The U.S. economy added just 266,000 jobs last month, sharply missing expectations for 1 million.
That report revealed an apparent labor shortage in the U.S. even as the number of job openings hit a record high.
That shortage is forcing more employers to hike wages just to get interviewees in the door.
This week, Chipotle announced it was raising its average hourly wage to $15.00 with a goal of hiring 20,000 employees across the U.S.
If the economy continues to see such high inflation pressures, the Fed may have no choice but to reevaluate its policy.
The Federal Open Market Committee will hold its next meeting June 15-16 and all of the focus will be on their message surrounding inflation.
Between now and then, the Bureau of Economic Analysis will release the personal consumption expenditures index for April and the Labor Department will release the May CPI, so the Fed will have plenty of inflation data to consider.
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