The inflation report isn’t looking good
I really hope those April showers lead to May flowers. Inflation is a big concern—maybe we’ll see some good news as summer approaches.
Tuesday’s Consumer Price Index (CPI) report revealed some troubling numbers. It climbed 0.6% in April, following a 0.9% increase in March. Year-over-year, consumer prices have jumped 3.8%, which is a noticeable uptick from March’s 3.3% annualized rate.
Of course, there were some justifications. Energy prices have taken a toll. The energy index increased 3.8% in April, making up over 40% of the total rise. Gas prices surged by 5.4% and 28.4% year-on-year. Food prices also saw a hike, with an overall increase of 0.5% for the month and grocery prices up by 0.7%.
That alone might have been alarming. But the concern extends beyond just the gas pump and grocery shelves.
Inflation was widespread in April, showing strong trends overall.
The Core CPI, which excludes food and energy, ticked up by 0.4% in April, compared to just 0.2% in the previous two months. The year-over-year core inflation rose from 2.6% to 2.8%. Shelter, being the largest component, increased by 0.6%, while both rent and homeowner’s equivalent rent rose 0.5%.
This isn’t merely an energy shock playing out in inflation figures. It seems indicative of a broader strength in the pricing structure. Increased energy costs elevate the expenses of transporting goods, impacting everything.
The Cleveland Fed’s underlying inflation gauge underscores this further. The median CPI increased by 0.4% in April, double the 0.2% rise from March. The trimmed average CPI, representing 16%, also saw a 0.4% rise, again double that of the previous month.
Considering these figures, it’s hard to dismiss the chance of rising inflation. While we don’t believe that escalating energy prices will result in sustained widespread inflation without monetary easing that intensifies price pressures, that’s still not great news. In simpler terms, businesses might feel squeezed as they face high gas station prices and a stall in consumer spending.
Median CPI and Trimmed Average CPI are designed to smooth out the extremes in monthly reports. They aim to minimize the noise from wild price changes—like fluctuating used car prices or soaring gas costs—focusing on the middle range. If the headline CPI appears strong while the median or trimmed average remains stable, the Fed can argue the issues are limited in scope. However, as both the median and the trimmed mean rise, it becomes increasingly hard to overlook the problem.
In April, these measures jumped. They have risen at a monthly rate of 0.4%, equating to around 5% annually. No one at the Fed could reasonably conclude that inflation is securely on course to return to 2%.
This makes the report worse than it initially seems. Sure, the headline numbers were startling. However, the core metrics reflect that the issues aren’t confined to just a few unstable categories. The inflation rate center is now higher.
The Fed will be observing with concern.
This is vital for monetary policy. The Fed can respond to price rises in gasoline over a month-long period, and can analyze temporary spikes in certain categories like airfare. But it’s much tougher to overlook reports showing: headline inflation, core inflation, shelter, median CPI, and trimmed average CPI all moving in the wrong direction at the same time.
Before the onset of the Iran war, markets were waiting for signs that inflation was returning to the Fed’s 2% target. But March and April brought an opposing trend, particularly evident in April. The disinflationary process seems precarious.
This report doesn’t conclusively prove that inflation is accelerating. Just one month doesn’t tell the whole story. But it does indicate that the previously comforting narrative about inflation has taken a serious blow. Hopefully, we can view April as just a rough month. Various factors like war-driven energy prices and seasonal disruptions seem to complicate the picture more than the underlying trends might suggest. Yet, the figures from the Cleveland Fed make it challenging to maintain that optimism. The point of the median CPI and adjusted average is to withstand the unexpected storms.
We certainly faced severe rain in April. Hopefully, May brings us those flowers.
