Surging inflation adds new stress to U.S. economy
The numbers: Consumer prices rose sharply again in April and drove the rate of inflation to the highest level in nearly 13 years, signaling greater stress on the economy as businesses grapple with supply shortages that are raising the cost of many goods and services.
The consumer price index soared 0.8% to match the biggest monthly increase since 2009, the government said Wednesday. Economists polled by Dow Jones and The Wall Street Journal had forecast a milder 0.2% advance.
The rate of inflation over the past year jumped to 4.2% from 2.6% in the prior month — the highest level since 2008.
The pace of inflation has surged after years of languishing at unusually low levels largely due to the rapid reopening of the U.S. economy.
Businesses can’t keep up in demand, a problem exacerbated by ongoing bottlenecks in the global trading system tied to the pandemic. Computer chips are especially in short supply and that’s held up production of new autos and other manufactured goods.
Americans are also rushing to dine out, travel or go far away for vacation, activities they shied away from during the pandemic. That’s also driving up prices at popular vacation resorts and other venues where people plan to congregate.
Senior Federal Reserve officials, who are supposed to protect the U.S. from high inflation, insist the increase is temporary. They contend inflation will subside by next year once the pandemic fades, most people go back to work and the global economy is largely recovered.
Investors are less sure. U.S. interest rates have risen in the past six months on worries about inflation and they could go even higher.
What happened: Price for a broad swath of goods and services rose by record amounts in April: Used cars and trucks, tires, computers, televisions, furniture, toys, computers and airline fares, among other things.
The cost of some of these goods and services, such as plane tickets, fell sharply in the pandemic and are now recovering lost ground. Yet prices for other products like used vehicles are setting new all-time highs. Used-vehicle prices shot up 10% in April.
The cost of used cars and trucks have now topped $25,000 for the first time. Prices have soared 21% over the past year, the CPI showed.
Automakers cut production early in the pandemic and rental agencies slashed fleet purchases, leading to a shortage of used vehicles. Demand has also soared because many Americans have dollars to spend from government stimulus payments and need cars to get around because of the slow return of public transportation as the pandemic eases.
The cost of food is also rising twice as fast as it was before the pandemic.
Gasoline prices, on the other hand, fell for the first time in almost a year. Yet lower prices are unlikely to last as more people take to the road this summer and global demand for oil strengthens.
If food and gas are set aside, so-called core consumer prices rose an even stronger 0.9% in April. That pushed the yearly rate up to 3% from 1.6%, the highest level in 26 years.
The core rate is closely followed by economists as a more accurate measure of underlying inflation.
Big picture: Inflation has risen sharply and it’s going to stay high for a while. Businesses still can’t get many vital supplies on time or at reasonable prices and now the cost of labor is going up.
Some economists contend the U.S. is on the verge of its worst bout of inflation in decades. They worry massive government stimulus payments are contributing to the problem and say the Fed is being too placid.
The U.S. central bank, for its part, is betting that what it calls “transitory” inflation will fade by next year and fall back toward its long-term goal of 2%. For most of the past decade the rate of inflation has hovered well below that mark.
The economy will likely be fine if the Fed is right, but if the central bank gets it wrong, all bets are off. The Fed could be forced to raise interest rates sooner than it wants and potentially choke off a budding economic recovery.
What they are saying? “The stimulus checks, job market dislocations, and supply chain issues caused by the pandemic are short-term drivers of inflation, and the Fed will look past them in setting interest rates,” said senior economist Bill Adams of PNC Financial Services.
“But there are ways to see how this temporary inflation could turn more permanent: Higher wages employers are using to attract workers could be inflationary over time; buoyant consumer demand could fuel a faster recovery than expected; or the upward price shocks could fuel higher inflation expectations.”
Market reaction: The Dow Jones Industrial Average DJIA, -1.99% and S&P 500 SPX, -2.14% fell in Wednesday trades. Yields on the 10-year Treasury TMUBMUSD10Y, 1.698% were higher after the CPI report.