Inflation Report Raises Concerns

So, it seems the inflation report from Tuesday was pretty grim. I mean, prices rose 0.6% in April, following a significant 0.9% increase in March. When you look at things year-on-year, consumer prices jumped 3.8%, which is quite the leap from March’s 3.3% annualized rate.

There are certainly excuses to consider. For one, energy prices have been a major factor. The energy index climbed 3.8% in April, and this accounted for over 40% of the total increase. Specifically, gasoline prices surged by 5.4% and a staggering 28.4% compared to last year. Food costs were up too—0.5% for the month, with grocery prices increasing by 0.7%.

I suppose that might have been enough to raise eyebrows, but the issue wasn’t limited to just fuel or groceries.

Wide-Reaching Inflation Trends in April

When we look at the Core CPI, which leaves out food and energy, it rose 0.4% in April, up from just 0.2% in the previous two months. The twelve-month core inflation also saw an increase, going from 2.6% to 2.8%. Notably, the shelter component, which is the largest part of the index, ticked up by 0.6%, while both rent and owner’s equivalent rent saw a rise of 0.5%.

This isn’t just an energy hike masking a bigger inflation problem. It might actually be about the overall stability in pricing. Rising energy costs affect transportation, which inevitably drives up the price of various goods.

The Cleveland Fed’s underlying inflation measure emphasizes this point. The median CPI rose 0.4% in April, double the rate from March, while the trimmed average CPI also climbed 0.4%, making it clear that inflation trends are shifting.

Given these numbers, it’s tough to dismiss the potential for ongoing inflation. While rising energy prices alone may not create sustained inflation without some easing in monetary policy, it still presents a troubling picture. In simpler terms, businesses might feel the pinch when they’re spending more at the pump, which could stall consumer spending.

The Median CPI and Trimmed Average CPI are designed to minimize noise by filtering out extreme fluctuations—like a sudden drop in used car prices or a spike in gas prices—by focusing on what’s typically happening in the market. If the headline CPI is high but the median remains stable, it gives the Fed some reassurance. But when the median and trimmed averages are trending upwards, it’s harder to ignore the reality of the situation.

These metrics indeed spiked, showing a monthly increase of 0.4%, which translates to about 5% annually. Anyone at the Fed would struggle to claim that inflation is comfortably on its way back to 2% at this pace.

This report tells us more than it might seem at first glance. The headline figures were startling, but it’s critical to note that the issue extends beyond a few volatile categories. Now, the core inflation numbers are also on the rise.

Fed Monitor the Situation Closely

From a monetary policy perspective, this is significant. The Fed can track fluctuations in gasoline prices or temporary spikes in airfare, but it faces a real challenge when all indicators—like headline inflation, core inflation, shelter, median CPI, and trimmed average CPI—are moving in the wrong direction simultaneously.

Prior to the commencement of the Iran conflict, the market had been hoping to see signs that inflation was heading back to the Fed’s 2% target. However, the results in March and April painted a different picture, particularly in April when the disinflationary trend appeared fragile.

This report doesn’t definitively prove that inflation is spinning out of control. A single month, after all, doesn’t deliver that kind of conclusion. Yet, it indicates that the more reassuring narrative surrounding inflation has taken a significant blow. Ideally, we’d hope that April was an outlier—thanks to war-related energy cost spikes, seasonal hiccups, and noise around shelter costs. These factors could make the report seem more daunting than the underlying trends might suggest. However, the data from the Cleveland Fed complicates that optimism, as that’s precisely why median and adjusted averages are used—to ride out the disturbances.

April tested us with heavy rains. Here’s hoping May brings some much-needed flowers.