The Consumer Price Index (CPI) climbed in April by 4.2% as the economy begins to open up, causing a demand for supply. It’s the biggest 12-month increase since 2008.
The CPI “measures a basket of goods as well as energy and housing costs.” In other words, it encompasses everything. All goods.
From The Wall Street Journal:
The Labor Department reported its consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% for the year ended in March. Consumer prices increased a seasonally adjusted 0.8% in April from March. The index measures what consumers pay for goods and services, including clothes, groceries, restaurant meals, recreational activities and vehicles.Higher prices for used autos surged 10% in April compared with the prior month—the largest monthly increase on record. That accounted for more than a third of the increase, the Labor Department said.
The core price index, which does not include food and energy, climbed 3% compared to a year ago. Other stats:
Prices were going to change from a year ago because of the pandemic. Prices only rose 2.2% from April two years ago.
I asked my financial friend if this instance of inflation is a good thing. He said no. He said part of it is the rebounding economy, but if a considerable portion of the economy is sitting at home and collecting unemployment it will backfire.
He offered me this example: A ten-year U.S. treasury bond yields about 1.7% as of Wednesday morning. If inflation is growing 4.8% you’re already in the hole with your money. In other words, the bond is paying you negative 3% after inflation.
It doesn’t help that the Fed wants to keep rates near zero. It prefers to keep those rates until its “preferred inflation measure is averaging 2$ and full employment has been achieved.”
Full employment? Okay, I understand that. But did you see the April jobs report? No one is going back to work despite all the job openings. Everyone is staying home and collecting unemployment.
Will prices go down? History says no:
“I think a lot of us are expecting a pretty significant increase of spending on services in the next couple months and that’s where a lot of the pressure on CPI is going to come from,” said Richard F. Moody, chief economist at Regions Financial Corp., referring to the consumer-price index.The longer that burst of spending persists, the more latitude producers have to raise prices, he said. And once prices go up, they seldom fall back to where they were, even if the acceleration in overall inflation is temporary, he added. “That very much matters in terms of what’s the lasting impact on household budgets,” said Mr. Moody.
Then again 2020 was unique so maybe prices will fall a little.
The new numbers have not worried Federal Reserve policymakers and many economists. They consider this report as “transitory” and expect everything to settle down later this year.
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