Some, but Not All, of the Price Jump Is Transitory Costs of airfare, used cars and restaurant meals offer clues to inflation puzzle
The surge in prices in April was a shocker. Excluding food and energy, the core index rose 0.9% from March, the biggest one-month increase since 1981, and three times more than Wall Street expected. This was as surprising as the subdued April payroll increase reported just five days earlier.
The 12-month core inflation rate jumped to 3%, the highest since 1995. This was partly due to “base effects” as price drops in April 2020, when pandemic closures were taking effect, exited the 12-month calculation. [Core CPI is up 4.4% over April 2109] But base effects cannot explain the March-to-April jump. (…)
Three broad trends are apparent, as illustrated by airfares, used cars and restaurant meals.
Returning to normal: Airfares jumped 10% in April from March, but since February 2020, airfares are still down 15% at an annualized rate. Thus, April’s increase simply reflects a pandemic-sensitive industry slowly returning to normal. It isn’t worrisome.
Transitory: Used-car prices leapt 10%, and are up 18% annualized from pre-pandemic levels. Used cars didn’t somehow become more expensive to make. But supply has shrunk and demand exploded as people unable or unwilling to use public transit hold on to their cars or try to buy one.
Thus, the rise in the used-car price simply represents a temporary windfall profit to those lucky enough to have a used car to sell. Eventually, demand will fall back and supply will catch up and those windfall profits and prices will disappear.
Rising costs: Prices of food away from home—mostly restaurant meals—rose only 0.3% but this may actually be the most worrisome category of all. First, you would have expected the battered restaurant sector to have slashed prices, just like airlines, when the pandemic began. That didn’t happen. In fact, prices have risen at a 3.6% annualized rate since February 2020, notably faster than the 2.7% average over the prior five years.
What sets restaurant meals apart from airfares and used cars is that the primary input is labor (along with food and rent). Labor has gotten more expensive: wages rose a hefty 0.7% in April. In leisure and hospitality they jumped 1.6% and are up 5% annualized since February 2020, increases that are highly unlikely to reverse.
This is great for restaurant workers who are among the lowest-paid of any sector and endured a lot of stress from dealing with the public during a pandemic. Nonetheless, someone has to absorb these costs and it looks like consumers will. These aren’t trivial expenditures, either: Food away from home accounts for 6.3% of the consumer-price index, compared with 2.8% for used vehicles and 0.6% for airfares.
The biggest category of all is shelter, where the outlook is especially tricky. Homes have gotten a lot more expensive but shelter inflation is based on rents, and those rose just 0.2%, for both owners and tenants, in April. Both are running at around 2% annualized since February, 2020, lower than in preceding years. Still, economists expect rental inflation to pick up as the job market tightens, and that, too, is unlikely to be transitory. (…)
Statistically, one can dismiss April’s jump showing that the largest price increases were in areas that were directly impacted by the pandemic and are thus only transitory. That is supported from the Cleveland Fed’s Median CPI, up a constant 0.2% in the last 3 months. But the 16% trimmed mean CPI, which eliminates the big outliers jumped 0.4% in April.
Let’s add more data to make everybody less confused!
The Atlanta Fed’s sticky-price consumer price index (CPI)—a weighted basket of items that change price relatively slowly—increased 5.5 percent (on an annualized basis) in April, following a 3.5 percent increase in March. On a year-over-year basis, the series is up 2.4 percent.
On a core basis (excluding food and energy), the sticky-price index increased 5.7 percent (annualized) in April and its 12-month percent change was 2.3 percent.
The flexible cut of the CPI—a weighted basket of items that change price relatively frequently—increased 23.1 percent (annualized) in April and is up 10.3 percent on a year-over-year basis.
The chart displays core 3-m annualized: Core Sticky: +4.0%, Core Flexible: +16.5%:
There are also things that kept inflation low in April. Owners’ Equivalent Rent, 29% of core CPI, is behaving strangely given housing trends. Transitory?
Richard Clarida, the Fed’s vice chairman:
I was surprised. This number [+4.2%] was well above what I and outside forecasters expected. (…) If, contrary to our baseline view, demand relative to supply was excessive and persistent and pushed up inflation and inflation expectations to levels that were not potentially consistent with our mandate, we would not hesitate to act and to use our tools to bring inflation back down to our 2% longer-run goal. (…) Honestly, we need to recognize that there’s a fair amount of noise right now, and it will be prudent and appropriate to gather more evidence.
Bloomberg’s Joe Weisenthal:
(…) Actually, the economic data is very complicated in general right now. Forecasters seem to be making errors left and right. Last week’s jobs report was also very confusing, since the pace of job creation seemed to fall well short of expectations, giving mixed readings on whether the labor market is already tight or not.
As for the inflation data, Matt Klein at Barron’s has a compelling column arguing that the overshoot can almost entirely be attributed to the economic reopening. Even the surging price of used cars is related to reopening, because the heavy buyers are car rental companies that need to restock their fleet.
So going back to the Fed for a second. Obviously some people think they’ve made some kind of mistake. Going too easy. Buying too many assets or whatever. But you could make the argument that they’re really being vindicated in their approach right now.
Last summer, they spelled out their new framework where they established that they want to see sustained inflation above recent trends before they would consider hiking. They also want to see a sustained, tight labor market that benefits wide swathes of the population. By focusing on the destination as opposed to the path, they’ve relieved themselves of trying to navigate the data in real time and come up with “The Right Answer”. Had we gotten this print under the old framework, there would be immediate pressure on the Fed to act now, and to think about hiking rates, even though the unemployment rate is at 6.1%. The new framework gives it time to breathe, to see how things unfold, rather than try to do some real-time course correction, using noisy data that’s impossible to forecast in an economy that’s engaged in an unprecedented reopening.
That, of course, assumes the Fed actually reaches its desired destination. If ever, at what point will they see they chose the wrong road and their focused destination was misplaced? The bond vigilantes are watching.
About the Fed’s tools? What could they be if the 20% of excess savings sitting in bank accounts find their way in the economy? House prices are up 12% and people are still bidding above the ask. Lumber prices have tripled and people keep buying. Major appliances are up 12% and sales remain strong. Bicycles and other sporting goods are up 7% and still in demand. Even sewing machines remain popular after 9% price hikes.
If these are reflections of the combination of wealth effect (house, equities, stimmies) and the YOLO credo while the Biden administration keeps pumping through 2022 to hold on Congress, what can the Fed do? Other than jack rates up?
(…) Infrastructure has traditionally been thought of as physical things — roads, train tracks or airports — and federal investment in these in the past has transformed the U.S. economy, helping drive growth and productivity.
Yet the pandemic has had a disproportionate effect on mothers and minority workers, prompting some policy makers to call for building a more robust “care economy” through spending on what’s now being called “soft infrastructure.” (…)
About 40% of the $2.25 trillion American Jobs Plan that Biden introduced in March consists of infrastructure pertaining to people. And the $1.8 trillion American Families Plan, announced last month, consists almost entirely of human investments. Both face hurdles to getting passed by Congress. (…)
[Deutsche Bank AG economist Brett] Ryan’s preliminary calculation of the Biden agenda’s possible impact — assuming it passes in its proposed form — is for adding 0.5 to 0.6 percentage point to growth in the first 12 months, figuring 10% of the spending would occur in the first year. (…)
With Busy Airports, Full Restaurants, U.S. Moves Closer to Full Reopening The return to a pre-pandemic normal in the U.S. is gaining speed as increased Covid-19 vaccinations and lower case counts fuel a broad rollback of restrictions.
The New York City subway hit its highest daily ridership since March 13, 2020, with some 2.2 million riders last Friday. More than 1.7 million people traveled through the nation’s airports on Sunday, the most since the start of the pandemic.
The San Francisco Symphony held its first in-person performance in more than a year, and the Kansas City Symphony plans to return later this month to its concert hall. On Monday, some restaurants in the U.S. hit a milestone, according to data from OpenTable. Seated diners at reopened restaurants on the reservation platform’s network reached 100% of 2019 levels. (…)
New York, New Jersey, Minnesota, Delaware, Pennsylvania and Rhode Island will lift most economic restrictions this month. (…)
Already, 28 states have fully reopened, according to research from the Kaiser Family Foundation. In 29 states, all nonessential businesses have reopened, and in 22 states there is no face-mask requirement. (…)
More than 58% of Americans over the age of 18 have received at least one dose of Covid-19 vaccine, according to CDC data.(…)
Data: CSSE Johns Hopkins University. Map: Andrew Witherspoon/Axios
TECHNICALS WATCH
- The S&P 500 is testing its 50dma:
- The NDX has failed both its 50 and 100 dma, both still rising.
- The S&P 600 wants to test its 100dma:
- But the Russell 2000 is already through both its 50 dma (declining) and its 100 dma (rising). Now testing the 207-208 resistance levels. Next stop, the 200dma at 190.
Elon Musk Says Tesla Has Suspended Accepting Bitcoin for Vehicle Purchases Tesla chief says bitcoin will be used for transactions ‘as soon as mining transitions to more sustainable energy’
Didn’t we all know about that months ago?
