CPI +0.8%: Inflation Is Here

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Wednesday, May 12, 2021

Certain economic metrics released on a weekly, monthly or quarterly basis have kept the narrative of inflation creep into the economy on its heels. Think back to last Friday, when analysts had been expecting upwards of a million new jobs and we only got a quarter of that. This morning, though Consumer Price Index (CPI) reads do not carry the weight of monthly Employment Situation numbers, they do point straight in one direction: +0.8% on the month. This indicates clear inflation.

April’s CPI was 4x higher than the +0.2% expected, and 20 basis points up from the unrevised +0.6% from March. It set a new all-time high at 266.8 points, which has steadily increased over the past 12 months. Core CPI (subtracting volatile food and gas prices) came in 3x better than expectations: +0.9%, which is also 3x better than the March read. Year over year, CPI headline is +4.2% and core is +3.0%.

Of course, when we look year over year, we’re comparing results from the deepest crater of the pandemic. This is something expected to continue through the spring months; by summer 2020, we had begun to see the first strands of recovery (before the second wave of the coronavirus hit over the fall and winter). But still, +4.2% year-over-year CPI is the highest print since September 2008 — back when everything got shaky ahead of the Lehman Brothers collapse (ask your parents).

Pent-up demand has been expected to make its appearance for a while now, and it has not missed its opportunity for a grand entrance. Used car and truck sales grew 10% month over month — maybe the highest jump on record. Transportation costs gained nearly 3%, and this is with Energy down overall last month. Meaning expect these figures to get even gaudier as other inflation metrics find their way into the discussion. Like next month’s release, for starters.

Markets were already down, in a week getting nosebleeds on valuations for both growth stocks and cyclicals. Both look out of favor mid-week. Inflation means to many market participants one thing: higher interest rates, which will bring the party of “cheaper money for longer” to an end, or at least on the calendar for termination. The Fed continues to assert its dual mission of obtaining full employment and optimum 2% inflation. Though we’re still not officially there yet, these CPI numbers reveal the tea leaves.

Last month’s print on Producer Price Index (PPI), the other shoe dropping in this inflation narrative, went up 1.0%. But tomorrow’s report is expected to garner just +0.3% for April. Are we seeing another ready-made upward surprise in store, or are producers notably lagging the higher price points as they have clearly already passed them along to the consumer? Historically, one always follows the other.

In short: inflation “worries” are real. Although they really don’t need to be worries at all: getting closer to full employment and 2% inflation (the 10-year bond is still 1.65% this morning) is what the Fed wants. That investors should be fearful of this is probably looking at the prism from the wrong angle: it’s not a panic-sell environment, it’s more a “let’s assess where we are” pause. Are your favorite stocks with solid Zacks ranks on sale right now? Maybe it’s time to take another look at them.

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