May 11, 2022 | 09:13
U.S. CPI: The Core Is No Bore
Underlying inflation re-accelerated in April, keeping the Fed on an aggressive course of policy tightening. The core CPI bounced 0.6% in the month (0.57%), doubling from the prior month's rate that was dragged down by a reversal in used car prices. Of concern, the core rate is again rising at the lofty 0.5%-to-0.6% pace of the prior five months, or a roughly 7% annualized clip. Ouch. While base-year effects allowed the yearly rate to ratchet down to 6.2% from a four-decade high of 6.5%, there won't be much further ratcheting unless the monthly pace simmers down. The 3- and 6-month annualized core rates are centred around 6%, or close to the lofty yearly rate.
The heated price gains in April were wide and far, apart from some further slippage in used car prices and a drop in clothing costs. Some of the big gainers were airfares posting a record monthly increase of 18.6% (adding a tenth to the core gain) and hotel fares up another 1.7%. A resurgence in travel is adding pressure, but there's no doubt that surging fuel costs are a big driver too. Also popping higher were new vehicle prices (1.1%) and medical care costs (0.4%). Importantly, shelter costs are tracking higher, posting a third straight monthly gain of 0.5% and up 5.1% y/y. Actual rent jumped 0.6%, while owners' equivalent rent leaped 0.5%, matching a high set in the 2006 housing boom. There will be plenty of inertia in rents in the year ahead even as blazing hot house prices cool their jets.
Let's not forget about energy and food costs. While a 6.1% (temporary) pullback in gasoline prices held the headline CPI to a 0.3% monthly increase (and lowered the yearly rate a couple ticks to 8.3%), the bigger concern is that natural gas and electricity prices rose in the month and, most importantly, food costs jumped another 0.9%, lifting its yearly rate to 9.4%, the highest since 1981. With fertilize costs soaring and drought conditions persisting, there will be plenty of inertia in food cost increases as well this year. Meantime, gasoline prices are up about 4% already in May, so no help there either.
Bottom Line: Inflation is getting hit on all sides: overheated labour markets and rising wages; sagging productivity as less-skilled workers are brought in to fill a record number of job vacancies; and soaring material costs and renewed supply-chain snarls stemming from the war in Ukraine and lockdowns in China. At the same time, surging energy costs are driving production costs higher for nearly everything, while both food costs and rents are unlikely to moderate for a while. The Fed has little option but to keep jacking up interest rates to at least neutral levels as fast as possible. While the CPI report may not spur a 75-bp hike at the June FOMC meeting, it will lock in a 50 beeper.