US Inflation Rises At The Fastest Rate Since 1995, And It’s Not Just Base Effect: BMO

The US economy’s booming recovery has created a temporary bump to inflation… that may not be temporary. BMO believes part of the jump in the consumer price index for April was due to a fleeting base effect. However, the bank’s senior economist Robert Kavcic argues there’s a little more to it. More recent growth is accelerating, indicating it’s more than just a temporary acceleration.

US Core Inflation Makes The Biggest Monthly Jump Since 1981

Core CPI made monster moves that haven’t been seen in decades. April’s monthly increase of 0.9% was the largest since September 1981. The annual rate of growth came in at 3.0%, the largest number since December 1995. While there are some base effect influences, one of the bank’s economists says this can’t just be written off. 

Short-Term Increases Are Much Larger Than Expected 

Central banks have stated they expect high inflation readings, as a result of the base effect. This is when the current period is compared to a previous period with unusual activity. When the previous period is artificially low, the current period’s growth rate is exaggerated. However, the previous and following periods may look fairly normal. It’s sort of a data mirage.

In this case, we’re comparing last month to the first full pandemic month. The pandemic was declared in mid-March of last year, with April being the first full month of restrictions. Artificial restrictions on activity resulted in a throttle on demand. 

The demand throttle also created a goods surplus in many industries. Retailers and producers holding surpluses had to slash or hold prices flat. This resulted in flat or negative price growth in the period, to clear inventory. Comparing this year’s much better planned inventory leads to a skew. However, some of this price growth isn’t just the comparison period.

US Inflation Is Running Hot After The Base Period

“True, year-ago prices were depressed, but the shorter-term inflation metrics are running even hotter. For example, 6-month annualized core inflation is running at 3.3%; and the 3-month rate is running at 5.6% annualized,” said Kavcic.

If that needs a little unpacking, annualized data is when you project a small period, as though it is the whole year. By taking the 6-month and 3-month annualized data, you can see the growth accelerating. Both of those measurements show much larger recent growth. It’s not just the base effect, inflation is ramping up even faster. 

“At the moment, it appears that a very tight goods market (high demand but supply bottlenecks) and rebounding prices for some services are combining to create powerful short-term moves” he said. 

Central banks are hoping the inflation is transitory, and it makes sense as a theory. However, the reality is inflation growth is accelerating after the base period. The more recent growth indicates inflation is getting a little hotter than central banks likely planned. Pick your poison — higher rates or higher inflation. One of them is coming. 

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  • Ian Brown 3 years ago

    Give it 2 more months for a rate hike. At which point they’ll hike, and Canada will follow with a sigh of relief. Right now everyone is trying to not to beat the US to a hike. If they’re the first one in, this stuff cascades.

  • Smaug 3 years ago

    US Inflation Rate Rises at Fastest Rate Since 1995

    In 1995, Greenspan was furiously increasing interest rates to head off inflation. He succeeded in doing so without causing a recession, heralded as the first ever “soft landing” achieved by a central bank, thus earning himself the nickname of “the Maestro”. Unfortunately, it went to his head, and from that point on he repeatedly tried the opposite stunt – rescuing the economy from asset price “deflation”. This asset price “deflation” was (really just a series of painful but necessary corrections (1997 Asian economic crisis, 1998 Russian Ruble crisis & Long Term Capital Management collapse, 2000-01 tech bubble collapse) that should have been allowed to run their course.

    I bring up this seemingly unrelated anecdote to point out that the last time inflation was rising this fast (1995), the Fed took it very seriously, and was aggressively tightening to deal with it. Powell is deliberately doing the opposite this time, and is going out of his way to signal exactly that to the markets. Adjust your expectations accordingly.

  • Bkl 3 years ago

    Well, inflation is indeed coming. However are at inflation levels equal to 2009. Which was due to money printing of 2008. I looked back at the interest rate, in 2009 it didn’t increase. Why? Because the global economy is not back on track yet. They are not going to rise interest rates.

    Don’t bet your money on home prices coming down due to interest increase. Holton was right.

    • Luigi Vampa 3 years ago

      Seems like Holton has himself a new moniker now 😛

    • Holton 3 years ago

      Thanks, while this place is filled with people who get upset over the cold hard truth. I’m happy there are still people who understands basic economics.
      Proper economic education makes a huge difference.
      Sometimes I feel like an engineer trying to argue with hicks on how to build a bridge. No, you cant bring down the whole bridge just because you don’t want to walk around the slope.

      • Luigi Vampa 3 years ago

        Just curious, but are you suggesting that Stephen and Co. here at better dwelling don’t have a “proper economic education.” If so, could you define the proper and improper types of economic education?

        • Holton 3 years ago

          Just curious, why are you so angry? Upset because you didn’t get an economics degree and people point that out during a discussion around economics? Oh no, such a salty little person.

          • Luigi Vampa 3 years ago

            Who’s angry? Twas a legitimate question that had nothing to do with me. You seem kind of defensive if anything. I’m a clinical research scientist… so no I don’t have an economics degree or purport to be an economic expert. But the people at BW certainly do have expertise on the subject and I was wondering why you think their research and opinions are irrelevant.

          • Gerry 3 years ago

            The fact that you think having an economics degree gives you greater insight than a monkey throwing darts only exemplifies your arrogance and ignorance. Economists created the unsustainable financial disaster we are in, and those economists honest enough to admit it have no idea as to when or how this train will leave the track.

        • Canaduh 3 years ago

          Plus there actually are people posting here with advanced Economics degrees.

          • Sam 3 years ago

            I’m interested in Holton’s takes. Also hearing other views, especially when they’re supported by economic expertise. That’s why I read this blog.

            I’d appreciate it if it was open debate, even heated debate without personal insults or insuations.

      • Smaug 3 years ago

        I’ve got a degree in economics. And I can tell you inflation is not the cure for anything. Inflation does not fall like gentle rain, gradually reducing debts and making everyone whole again. Nor does it preserve asset values. Some of the more severe asset price corrections occurred during inflationary times. The 1974 stock market and the 1979 bond massacre are examples. Ultimately, interest rates MUST climb with inflation, even if central banks hold off for as long as possible.

        In the meantime, inflation has ugly, ugly consequences. Not everyone’s income rises with inflation, even if average incomes do. Some incomes will fall far behind. And those people will have trouble keeping up with the bills even if their interest rates do not go up. But keep promoting inflation as a cure-all, and pretending it makes you “educated” if that makes you feel better. Joseph Stiglitz can’t be the only one foolish enough to believe inflation is a public good. He’ll appreciate the company.

  • Doomcouver 3 years ago

    Hidden inflation is waking up after taking a long nap, and it’s probably going to wreck the global economy.

  • IthoughtWeWereSmarter 3 years ago

    Regardless of interest rates, home prices will be coming down. It’s not rocket science why this happened, but it went so, so far past sane levels compared to local’s ability to shoulder costs!! And that’s everywhere in Canada now, but especially Golden Horseshoe and Vcr.
    We are now entering the WHOOPS stage!! Just watch it unfold!

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