APR. 14, 2021
Source: Bureau of Labor Statistics
The core CPI rose in March by 0.3 percent, the most in seven months, and is now up by 1.6 percent on an annual basis. Details were softer than the headline, which was lifted by the first major round of a post-pandemic resetting: prices for lodging away from home, auto insurance, public mass transit, and admission to sporting events all spiked last month even as all remain sharply lower year-over-year. In addition, car rental prices surged again in continuation of another idiosyncratic COVID-driven trend. More broadly, the Cleveland Fed’s median CPI moved higher by a tame 0.2 percent and is now advancing at its slowest annual pace in more than seven years.
So beyond a small number of outliers, there continues to be a disconnect between short-term pressures at the wholesale and retail levels. Thus far in 2021, the core PPI has jumped by an annualized 8.4 percent and the ISM’s prices paid index has averaged a lofty 84.6 while the core CPI has risen by just 1.9 percent annualized. The lag between producer and consumer prices is generally not very long, so the lack of transmission to this point should be taken as at least a strong hint that a more endogenously-driven inflation is still not developing and that any reopening-related pickup in the months ahead would be unlikely to be sustained. It is also a signpost that the structural factors that have held inflation in check in recent decades are still very much in place. Wholesale and retail inflation moved largely in lockstep in the 1970s, 1980s, and 1990s, but, thanks to economic diversification, Fed credibility, and technological advancements, the relationship has broken down in the years since. Early stage price pressures simply do not translate to the cash register as readily as they used to.
This is not to say that a sustained inflation can’t take hold, but rather that the bar to produce it has been set higher. In fact, the longer-term inflation risks are more elevated than at any time in the last four decades given the unprecedented monetary stimulus and robust economic recovery. It should be stressed again, however, that inflation is a lagging indicator and won’t show up until well after the conditions that would give rise to it are in place. With this expansion still shy of its first anniversary, it remains a good bet that the timeline to the inflation that will draw the Fed off of the sidelines will be measured in years rather than months or quarters.
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