- Consumer prices surprised on the upside in April, rising 0.8% month-on-month (m/m), versus expectations for a 0.2% m/m gain. That boosted the headline inflation rate to 4.2% year-on-year (y/y), up from 2.6% in March.
- A 10% m/m gain in used vehicle prices accounted for over one third of the headline increase in inflation. That was the largest one-month increase in used vehicle prices ever.
- Food prices rose a hearty 0.4% m/m in April, while energy prices fell 0.1% m/m, with gasoline prices downs a larger 1.4% m/m.
- Core prices (ex. food and energy) also came in above expectations, rising by 0.9% m/m% (the median consensus estimate was for 0.3%). That drove year/year core inflation to 3% in April – the largest increase since 1996. Used vehicle prices were a big part of the story, but inflation pressures accelerated for a variety of goods and services in April. The biggest factors were shelter (+0.4% m/m), which accelerated on prices for lodging away from home (+7.6% m/m), airline fares (+10.2%), recreation (+0.9% m/m), motor vehicle insurance (+2.5% m/m), and household furnishings and operations (+0.9% m/m). Significant price increases were also seen for car and truck rentals (+16.2% m/m), new vehicles (0.5% m/m) and prescription drugs (+0.5% m/m).
Key Implications
- April’s inflation report provides plenty of fodder for those worried about an acceleration in inflation. Many have worried that the large fiscal stimulus underway in the U.S. will run up against pandemic-related capacity constraints and supply chain disruptions and cause a surge in price pressures. Many of the biggest price hikes in April do fall in areas that have seen the biggest disruptions during the pandemic – travel-related areas like airline fares, car rentals and hotels, where demand is picking up sharply as Americans are vaccinated.
- We expect many of these pandemic related price swings to be transitory. However, other less-affected areas are also seeing sturdy price increases, and April marked the third straight month of accelerating price increases for core services. We expect the acceleration in economic growth will result in a continued pick up in core inflation in the months ahead. But that the pace is unlikely to worry the Fed too much now that it is targeting an average rate that will require an overshoot of 2% in order to make up for past weakness.
