Inflation is here, but will it last?
|Yesterday was a big day for the Inflationistas. For the month of April, Core CPI (excluding food and energy) was up 3% year-over-year and CPI (including food and energy) was up 4.2% year-over-year. I had mentioned in a past article that CPI numbers above 3% should be expected for the months of April and May due to base effects - distorted inflation reading because of extremely low (or high) inflation numbers the year prior. Everyone knew a higher CPI reading was coming because of these base effects, and yet, the mainstream is acting as if inflation is out of control and only going to get worse. The truth is, this is yet to be determined.
The high CPI reading was not all due to base effects, some of it was from legitimate demand -“pent-up” demand as the economy reopens. I talked a bit about that, here. But, how much of the CPI was due to base effects? I’ve seen measures anywhere from 20%-50%. Base effects distort the actual data which is clear with the 20%-50% range. The true test will be once these base effects wear off in a couple of months, to see if inflation can sustain these levels or if it rolls over again like it has every other time since 2008.
From a labor market perspective, the weight of inflation will be on the back of the services sector because durable goods, housing, tech, and financial are pretty much tapped out. Services on a good year only account for about 4% of GDP, so they’ll have their work cut out for them. Just remember, as the economy reopens, supply chains come back online. Supply chain disruptions are one of the main causes of the rise in global commodity prices. Supply catching up to demand is certainly not priced into the market. This dynamic will make for an interesting path ahead.
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