One of the biggest news stories in recent days has been US inflation numbers. In this podcast, I discuss the issue.
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A bigger-than-expected increase in U.S. consumer prices has put investors on high alert for more signs of inflationary pressure that could tilt the Federal Reserve toward raising interest rates.
Several investors said the consumer price index report released on Wednesday was not enough to prompt the Fed to change its course. But the news, which fueled worries that the economy is moving toward sustained higher inflation, rattled markets.
“The argument is whether this bout of inflation is transitory or here to stay. And time will tell. I think it’s here to stay until you see labor costs and commodity costs mitigate some,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.
“This obviously brings the thought that maybe the Fed will have to change its easy policy sooner than expected.”
Major U.S. stock indexes ended down about 2% each (.SPX)following the U.S. Labor Department report, which showed the consumer price index jumped 0.8% last month, the largest gain since June 2009. The “core” reading, which excludes the more volatile food and energy portions, jumped 0.9%. read more
“Hotter than expected but not overheating,” said Gregory Daco, chief U.S. economist at Oxford Economics in New York, said of the economy. “The Fed is not going to change any policy on any one report so I wouldn’t expect this to be a gamechanger.”
Investors are turning their attention to upcoming economic reports that could fill in the inflation picture, especially U.S. producer prices data for April on Thursday. Economists expect wholesale inflation to rise, as it did in March.
April retail sales, industrial production and business inventory numbers will be issued on Friday.
Inflation watchers wonder if the economy’s recovery from the COVID-19 pandemic is starting to pick up too much steam. Americans are getting vaccinated against the coronavirus, and many states are lifting restrictions on businesses. Stimulus checks were sent to qualifying households in March, helping to boost demand.
But the evidence is not clearcut. Friday’s jobs report showed U.S. job growth unexpectedly slowed in April, generally a sign of cooling activity. read more
Fed Vice Chair Richard Clarida said on Wednesday it will be “some time” before the U.S. economy is healed enough for the Fed to consider pulling back its crisis levels of support and he expects the rise in prices to be temporary.
Some market participants noted Treasuries’ reaction to the CPI report was more subdued than stocks’, suggesting expert interest rate watchers do not anticipate Fed tightening.
“The thinking is these price increases are still transitory…. (Otherwise,) the bond market should be more concerned about it, and it’s not,” said Patrick Leary, chief market strategist and senior trader at Incapital in Minneapolis.
The yield on 10-year Treasury notes was up 7.1 basis points at 1.695% by late Wednesday after climbing to 1.697%, its highest since April 13 and on pace for its biggest one-day basis point increase since March 18.
Worries about potential for rising inflation and interest rates have hurt some large-cap growth stocks recently. That pattern continued on Wednesday, with the Nasdaq leading losses among the three major equity indexes.
The question among investors is, “How long are rates going to stay rock bottom?” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
“One data release is not going to change the Fed’s position,” she said. More data is going to be needed for that to happen, including “data that suggests a stickiness with higher inflation and higher costs. We’re not there. We’re still in the rebound stage.”
The numbers: Consumer prices rose sharply again in April and drove the rate of inflation to the highest level in nearly 13 years, signaling greater stress on the economy as businesses grapple with supply shortages that are raising the cost of many goods and services.
The consumer price index soared 0.8% to match the biggest monthly increase since 2009, the government said Wednesday. Economists polled by Dow Jones and The Wall Street Journal had forecast a milder 0.2% advance.
The rate of inflation over the past year jumped to 4.2% from 2.6% in the prior month — the highest level since 2008.U.S. inflation rate hits 13-year high12-month change in the consumer price indexSource: Labor Department, Haver AnalyticsRECESSION2008’10’15’20-4-20246 %
The pace of inflation has surged after years of languishing at unusually low levels largely due to the rapid reopening of the U.S. economy.
Businesses can’t keep up in demand, a problem exacerbated by ongoing bottlenecks in the global trading system tied to the pandemic. Computer chips are especially in short supply and that’s held up production of new autos and other manufactured goods.
Americans are also rushing to dine out, travel or go far away for vacation, activities they shied away from during the pandemic. That’s also driving up prices at popular vacation resorts and other venues where people plan to congregate.
Senior Federal Reserve officials, who are supposed to protect the U.S. from high inflation, insist the increase is temporary. They contend inflation will subside by next year once the pandemic fades, most people go back to work and the global economy is largely recovered.
Investors are less sure. U.S. interest rates have risen in the past six months on worries about inflation and they could go even higher.
What happened: Price for a broad swath of goods and services rose by record amounts in April: Used cars and trucks, tires, computers, televisions, furniture, toys, computers and airline fares, among other things.
The cost of some of these goods and services, such as plane tickets, fell sharply in the pandemic and are now recovering lost ground. Yet prices for other products like used vehicles are setting new all-time highs. Used-vehicle prices shot up 10% in April.
The cost of used cars and trucks have now topped $25,000 for the first time. Prices have soared 21% over the past year, the CPI showed.
Automakers cut production early in the pandemic and rental agencies slashed fleet purchases, leading to a shortage of used vehicles. Demand has also soared because many Americans have dollars to spend from government stimulus payments and need cars to get around because of the slow return of public transportation as the pandemic eases.
The cost of food is also rising twice as fast as it was before the pandemic.
Gasoline prices, on the other hand, fell for the first time in almost a year. Yet lower prices are unlikely to last as more people take to the road this summer and global demand for oil strengthens.
If food and gas are set aside, so-called core consumer prices rose an even stronger 0.9% in April. That pushed the yearly rate up to 3% from 1.6%, the highest level in 26 years.
The core rate is closely followed by economists as a more accurate measure of underlying inflation.
Big picture: Inflation has risen sharply and it’s going to stay high for a while. Businesses still can’t get many vital supplies on time or at reasonable prices and now the cost of labor is going up.
Some economists contend the U.S. is on the verge of its worst bout of inflation in decades. They worry massive government stimulus payments are contributing to the problem and say the Fed is being too placid.
The U.S. central bank, for its part, is betting that what it calls “transitory” inflation will fade by next year and fall back toward its long-term goal of 2%. For most of the past decade the rate of inflation has hovered well below that mark.
The economy will likely be fine if the Fed is right, but if the central bank gets it wrong, all bets are off. The Fed could be forced to raise interest rates sooner than it wants and potentially choke off a budding economic recovery.
What they are saying? “The stimulus checks, job market dislocations, and supply chain issues caused by the pandemic are short-term drivers of inflation, and the Fed will look past them in setting interest rates,” said senior economist Bill Adams of PNC Financial Services.
“But there are ways to see how this temporary inflation could turn more permanent: Higher wages employers are using to attract workers could be inflationary over time; buoyant consumer demand could fuel a faster recovery than expected; or the upward price shocks could fuel higher inflation expectations.”
- The reopening economy is seeing stronger inflation, which many expect to be temporary, including famous economist Paul Krugman.
- The Nobel laureate told Insider that watching several indices gives a clearer picture than the Fed’s top measure.
- Anecdotal evidence and workers’ contracts can also catch some price growth missed by other data, he said.
As comes the recovery, so does inflation.
The gradual reopening of the US economy is quickly lifting consumer demand as Americans rush to revive their pre-pandemic habits. The surge in spending has already pushed popular gauges of inflation higher, but experts see price growth accelerating further as the recovery continues.
Debates over how inflation trends over the next year split economists into two camps. One group — which includes Republicans and even moderate Democrats like former Treasury Secretary Larry Summers — fears the latest stimulus package and strong demand will spark rampant and dangerous price growth. The other sees higher inflation fading as the economy settles into a new sense of normal.
Nobel prize-winning economist Paul Krugman sits squarely in the latter group, but he told Insider he’s still keeping an eye out for a potential inflation shock.
“Both sides are predicting the stuff that we’re seeing now,” he told Insider. “Anyone who wasn’t expecting to see some prices of some things rise as the economy came roaring out of the pandemic wasn’t paying attention,” he said.
It’s too early to say whether either side of the inflation debate is right, he said. Bottlenecks and supply-chain issues are behind some rising inflation gauges, but it remains to be seen whether those effects subside or give way to broad and concerning price growth.
Krugman said he’s watching a handful of indicators to determine whether inflation poses a significant risk to the recovery. Core inflation isn’t enough, since various bottlenecks could elude the benchmark, he said. Instead, the inflation-metric dashboard maintained by the Federal Reserve Bank of Atlanta gives a more holistic view of nationwide price growth.
Sticky inflation indices, which track a subset of goods and services that change price somewhat rarely, are also worth monitoring, he said. Krugman also highlighted trimmed-mean inflation gauges, which exclude large price swings to more accurately track broad inflation trends.
“The whole question is whether prices that are not changing all the time are being set with expectation of inflation in the future, whether we get this leapfrogging process, which is what makes inflation — once embedded in the economy — harder to get rid of,” the economist said.
Krugman also backed the use of some less conventional metrics. Wage contracts and union agreements are less easy to track, but data on companywide pay can reveal whether firms are building the expectation of higher inflation into their compensation, he said.
Getting some qualitative data is also worthwhile, the economist added. Surveys show Americans bracing for stronger inflation as the economy bounces back. Such data and other anecdotes can provide some insights into nationwide price growth that indices miss, Krugman said.
“I’m forcing myself to read the Beige Book these days, because I think, in some ways, it’s going to be a better guide than the statistics are,” he added, referring to the Federal Reserve’s periodic report of current economic conditions.
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