The Market Today

Base Effects, Surge In Auto Prices, and Economic Reopening Push Prices Up by the Most Since 2008

by Craig Dismuke, Dudley Carter


Base Effects, Surge In Auto Prices, and Economic Reopening Push Prices Up by the Most Since 2008

April’s CPI report showed a much firmer tone for inflation than was expected as base effects intensified and auto prices surged by the most in records since 1953. At the headline level, prices rose 0.8% MoM and 4.2% YoY, easily outpacing expectations for gains of 0.2% and 3.6%. The YoY rate compared to 2.6% in March and was the sharpest annual increase since 2008. While food prices rose in April, energy prices were actually down on the month. The details of the report showed a broad firming across most categories, but a surge in the price of used autos stood out. The index tracking the cost of used cars and trucks jumped 10% in April alone, marking the largest single-month increase since 1953 and accounting for more than one-third of the monthly increase in the headline CPI total. The auto industry has been disrupted by a chip shortage that has led to lean inventories as major carmakers cut back production.

Surging auto prices also drove core prices up 0.9% MoM in April, a much hotter read than the 0.3% increase economists expected. As a result, the YoY rate moved up from 1.6% to 3.0%, stronger than the 2.3% increase expected and the fastest gain for core prices since January 1996. While the unusually large increase in auto prices drove much of the gain, most categories showed traction. Core goods prices were up 2.0%, a sizeable monthly gain, on the boost from autos as well as a 3.1% gain for education and communication items, a 1.2% gain for recreation commodities, a 0.9% gain for furnishings, and a 0.6% increase in medical care goods. Core services prices, unaffected by the auto price surge, rose 0.54% in April, the strongest month since October 1992. In signs that reopening of the economy also had an impact on pricing, the cost of lodging away from home jumped 7.6%, the strong month since at least 1997; airfare jumped 10.2%, the largest jump in records since 1989; and car rental costs surged 16.2%, the second largest gain since at least 1998. Key categories of rent and medical care services were more in line with recent averages.

Bottom Line: Prices were expected to surge in April as base effects became more pronounced. As evidenced by surging prices in hotels, airfare, and car rental costs, economic reopening is affecting consumer prices. Bottlenecks are on the radar as a dynamic that could drive prices up in some areas, as shown by the surge in auto prices, but are expected by Fed officials to fade as supply catches up. However, the size of the annual prices gains, against a backdrop of firming across a number of categories, will escalate the debate around whether or not firmer prices will persist, or prove transitory as the Fed believes.



Stocks Continue to Stumble as More Data Points to Pandemic-Related Disruptions Investors Fear Could Stoke Inflation

While Fed officials seem unconcerned about a sustained uptick in inflation (more below), market commentaries continue to cite the possibility of faster inflation as a reason for this week’s equity weakness. The Dow slumped more than 1.4% in another topsy turvy day on Wall Street that saw the Nasdaq open down more than 2% amid global tech weakness before recovering to close just 0.1% lower. The S&P 500 fell 0.9%, weighed down by losses in 10 of its 11 sectors. The latest reports to stir some inflation angst, ahead of this morning’s CPI report, were the NFIB’s April Small Business Survey and the BLS’s March JOLTS report. The NFIB said the inability to fill open positions was the most severe in records since 1973 and the number of businesses raising prices was the highest since the early 1980s. The BLS reported a record number of job openings, including in some of the sectors hardest hit by the pandemic, which added to growing speculation labor supply is not keeping up with demand (more below). Despite another day of equity weakness, Treasury yields continued to inch higher. The 10-year yield rose 2.0 bps to 1.62%.

Wednesday’s equity boards showed a mix of gains and losses across Asia and Europe, although the broader tone remained soft, while sovereign yields had generally inched lower. U.S. equity futures continued to trade weaker ahead of this morning’s highly anticipated CPI report, with the Nasdaq off 0.5% and outpacing smaller 0.3% declines for the Dow and S&P 500. Just prior to the release of April’s inflation report, the Treasury curve was essentially flat on the day. Following the surprisingly firm CPI report, the 10-year yield rose 3.0 bps to 1.65% as of 8 a.m. CT.


Record Job Openings Point to Strong Labor Demand: Job openings rose more than expected in March to a record 8.123 million. The 597k increase, the strongest since last summer, was largely driven by three sectors: manufacturing openings jumped by a record to a record (706k) and opportunities for state and local educators (330k) and leisure and hospitality workers (1.2mm) both set record highs. Combined with the January and February gains, more than 1.3 million jobs were posted in the first quarter. The data support the argument that labor demand remains strong and that supply issues may be to blame for April’s disappointing payroll report. The NFIB said earlier Tuesday that record number of businesses (since 1973) were unable to find workers to fill open positions in April. Adding to the message of continued labor improvement, hires rose with quits and layoffs declined.


Cleveland Fed President Mester, in an unscheduled interview, admitted the April jobs report was disappointing but said “I don’t think it changes my outlook – the outlook is still bright.” She wants and expects to see further progress in the labor market recovery for the remainder of 2021 and believes inflation measures may end the year above 2% before they decline next year. However, she noted “there are upside risks to that forecast and that’s where we’re very focused.”

Fed Governor Brainard stressed that April’s jobs report “is a reminder that the path of reopening and recovery…is likely to be uneven and difficult to predict, so basing monetary policy on outcomes rather than the outlook will serve us well.” Brainard joined a growing list of those blaming supply issues for weaker hiring, saying the semiconductor shortage, virus concerns, and childcare all remain “impediments” for some to return to work. Growth should accelerate this quarter after the “strong rebound” last quarter, but she cautioned that activity is “far from our goals” and uncertainty is “greater than usual.” On inflation, “there are a variety of reasons to expect an increase…associated with reopening that is largely transitory.” Therefore, “it will be important to remain patiently focused on achieving the maximum-employment and inflation outcomes in our guidance.”

San Francisco Fed President Daly repeated Tuesday that she is “bullish” on the economic recovery and described bottlenecks as normal when an economy is in a transition phase. She said, “Bottlenecks explain both price increases and labor shortages” and believes both are “likely transitory.”

Atlanta Fed President Bostic said that Fed policy needs to remain accommodative as the economy, while clearly on the road to recovery, has a long way to go yet. He said, as others have, that the Fed has tools it would use if inflation were to move up too quickly. As most others have also said, however, he expects any spikes for inflation to be temporary phenomena that won’t require the Fed to respond.

Philadelphia Fed President Harker said the “recovery is still a work in progress, and there’s no reason to withdraw support yet.” Talking about tapering now would be “premature.” However, he expects growth this year of around 7% and said recent dynamics, including elevated household savings, are “setting the table for a recovery that could be long and durable.” He said that “given that the underlying fundamentals of the economy look so strong,” April’s “disappointing” jobs report was “probably an outlier.” “With so much fiscal support and monetary accommodation, there is some upside risk to increased inflation,” he said, “But for now, I’m forecasting 2.3% headline…for 2021 with core…at 2%.”

St. Louis Fed President Bullard shrugged off the April jobs miss in an unplanned interview, saying that it’s too early in the recovery to expect big jobs numbers. He continues to believe inflation will be firmer than others expect and that some, but not all, of the coming increase will be transitory. Nonetheless, he said, “It’s too early to talk taper here.”

Minneapolis Fed President Kashkari said the economy is “long way away from maximum employment,” but “poised for a very strong recovery if we keep doing a good job in getting Americans vaccinated so that we can reopen everything safely.”

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