The 0.8% increase over March is the largest one-month jump in more than 10 years.
By Manuel Gutierrez, Consulting Economist to NKBA
Is the latest jump in consumer prices a worrisome sign that inflation has arrived?
Based on recent trends in prices, with steady upward movement month after month, it is appearing more likely.
The rising trend continued in April with the Consumer Price Index (CPI) increasing by a concerning 0.8% from March. This is the largest one-month jump in more than 10 years — not since June 2009, when the CPI rose by 0.83%.
Figure 1 provides a clear visual confirmation of this trend. Since last October, prices have been rising at a higher rate each consecutive month.
April’s Consumer Price Index jumped by 0.8%, the highest monthly spike in more than a decade, fanning fears of inflation.
The right panel of Figure 1 shows annual price changes for the overall CPI, labeled “All Items,” and for the Core CPI. The Core excludes food and energy products on the assumption that since these two categories are more volatile, the Core is a more realistic portrayal of the underlying inflation trend. In any case, both the overall index and Core CPI are up sharply over the last few months.
The explosion in prices is the result of several factors. One is the tariffs that were imposed on China and took effect last year. Initially, the tariffs impacted all products imported from that country, currently running around $430 billion annually. In the latter part of last year, tariffs were lowered and now impact approximately half the imports. The logic behind introducing the tariffs was that by making Chinese products more expensive, products made in the U.S. would be more competitive and bring about a rebound in U.S. manufacturing. This has not happened yet, as businesses have simply shifted their imports to other countries.
A second factor is the excessive amount of Federal government spending, including the direct cash programs crafted for consumers. The plan was put into place under the theory that it would boost demand and therefore employment. Consumer demand has in fact increased, but there is not necessarily a corresponding increase in supply, which has resulted in rising prices.
Although price changes differ among the millions of products available to consumers, many product categories have seen their prices noticeably jump.
Figure 2 displays the latest changes in prices for several major product groups.
The month’s price increases, shown in the left panel, are led by Transportation Services, which rose by 2.9% in April. It is also the third highest on an annual basis, tracking 5.7% above last year. Included within this category are airfare, car rentals and similar items.
Electricity is next, up a steep 1.2% over the previous month and higher than last year by 3.2%. However, total energy costs overall are down 0.1% from March.
Shown in the right panel of Figure 2 is the 4.2% overall annual increase, which is included in the general chart in Figure 1. Energy prices lead with a whopping 25% price inflation, mostly as a result of higher gasoline prices, which are up by nearly 50%.
It should be kept in mind, however, that the annual comparison is somewhat distorted, since April 2021 is being compared with April 2020, a month during which virtually everything shut down and prices dropped due to the initial reaction to the pandemic.
The monthly comparison is a fairer read, but it also shows clear price inflation.
An area of particular interest to K&B-related businesses is the impact inflation is having on mortgage rates. A specific mortgage rate reflects the level of risk to the lender. Potential home buyers with low credit ratings or low income may represent higher risk and will face higher mortgage rates, with those who represent lower risks enjoying reduced mortgage rates. Another factor impacting rates is expected inflation. When facing evidence of higher inflation, lenders may only be willing to lend at higher mortgage rates to compensate for the loss of value of their funds due to price increases.
Despite the recent signs of inflation, however, a corresponding impact has not yet occurred on mortgage rates. In fact, the opposite is true. Mortgage rates fell throughout April, as shown in Figure 3, and remain under 3%.
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