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.
Like this post? Like us on Facebook for the next one in your feed.