No one said reopening would be cheap

Summary

The 0.8% surge in consumer prices in April, the largest monthly increase since 2009, was the latest sign of supply not being able to meet the onslaught of demand as the economy opens. Goods and services prices both charged higher, leading the CPI to increase 4.2%over the past year. Today's report sets up some tough base comparisons for this time next year. We suspect that even as inflation has transpired earlier and to a greater degree than expected, the FOMC will still want to see how the dust settles before reacting to inflation given the unique confluence of events and the current state of the labor market.

Prices surge in April

Of all the shortages being discussed right now, signs of inflationary pressures are not one of them. Commodity prices have continued to tear higher and more manufacturers and services firms report input costs rising than at any time since at least 2008. Businesses are increasingly passing those costs on, as indicated by April NFIB's survey showing the largest share of firms raising prices since 1981. Today's CPI report showed prices rising 4.2% over the past year, the largest increase since 2008. That can only partly be traced to low base comparisons after lockdowns sent prices tumbling last April by the most in a single month since the throes of the financial crisis in 2008. Base effects do not explain all the strength–inflation is rising now.

Consumer prices leaped 0.8% in April, the largest monthly gain since 2009. Yet unlike prior months when prices soared to such a degree, the rise cannot be chalked up to energy, or even food. Core inflation skyrocketed 0.9% in April, the most since 1981. Over the past three months, core inflation is up at an a5.6% annualized pace. 

Prices boiling

The recent strength in inflation comes down to two main causes: supply constraints and the reopening of the services economy. Price pressure is therefore bubbling for both goods and services, in contrast to most of the past 15 years when it was one or the other.

A range of shortages of key inputs is constraining production, which is limiting supply and giving way to higher goods prices. This is particularly evident in the prices of autos. Used autos surged 10%in April, as strapped supply has driven up wholesale prices. That was the largest monthly increase in the series' nearly 70-year history and accounted for more than one-third of the headline's gain. New auto prices also posted a solid 0.5% monthly gain. Auto production has largely been disrupted in recent months by semiconductor shortages, which don't appear to be abating anytime soon. Given the recent surge in sales and decline in retail inventory, we expect to see less dealer discounting on autos and consumers paying closer to sticker prices. Autos are therefore set to exert upward pressure on core goods prices for some time.

Other categories of goods also moved higher like household furnishings (+0.9%), recreational goods(+1.2%), and apparel (+0.3%), signaling a pick up in demand and perhaps companies increased ability to pass on higher costs. As supply struggles to keep pace with demand, we expect good prices to firm further this year.

At the same time, the reopening of the services sector is giving way to a surge in demand. Services costs are rising as a result. The pick-up in travel and hospitality-related activities specifically is boosting prices. Car and truck rentals surged 16.2% in April, which marks the second consecutive month of double-digit gains. Similarly, airfare prices jumped 10.2% while hotel prices rose 7.6%. Admissions to sporting events was another category to see particularly strong price gains, up 10.1% in April. 

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