The Consumer Price Index (CPI), the primary barometer of inflation, was up 8.3% for the 12 months ending April 2022. Optimists noted the sequential improvement in CPI from 8.5% in March by suggesting the recent surge in inflation may have peaked, while skeptics noted that inflation remains near a 40-year high.
With inflation remaining widespread, looking below the surface offers more information on a subtle shift in the complexion of inflation, along with clues on the potential impact on consumer spending. Indeed, April’s CPI report was notable because inflation might be more entrenched than “transient.” This can be seen by examining the Atlanta Fed’s “sticky” and “flexible” CPI measures, which distills the overall CPI reading into cyclically sensitive and insensitive measures. Flexible CPI measures volatile and cyclical categories such as energy, transportation, and apparel, while sticky CPI includes fewer volatile categories such as housing, medical, restaurants, and leisure.
COVID dramatically impacted flexible CPI as pent-up demand for big-ticket items surged and global supply chain issues dramatically limited supply. As a result, by April 2021 flexible CPI had jumped to over 10% while sticky CPI was just over 2%. With inflationary pressures persisting, companies have successfully boosted prices to offset margin pressures, while consumers appear to be shifting their consumption from goods to services. However, this has caused sticky inflation to come under pressure. The rate of growth for sticky CPI was 4.9% in April, the fastest pace since 1991. This is bad news for those hoping for a rapid decline in inflation and further complicates the Federal Reserve’s job.
It’s important to remember that flexible CPI is prone to wild swings from month to month, while sticky CPI is slower to respond to changing market conditions. As a result, sticky CPI is a decent proxy for understanding inflation expectations and judging where inflation might be headed. As this week’s chart illustrates, sticky CPI appears to be trending higher; that might help explain why consumer sentiment is at the lowest level in 30 years, which does not bode well for consumer spending and economic growth. Indeed, the sticky CPI rate of 4.9% is well above the Fed’s target of two percent, underpinning the Fed’s desire to raise rates above neutral and further exacerbating the already negative investor sentiment.