Gasoline Prices Pull CPI Higher

The Consumer Price Index (CPI) jumped 0.6% in March, the fastest monthly pace in nine years. A 9.1% surge in prices at the gas pump accounted for a good portion of those gains. Electricity outages in the oil patch last month and bottlenecks triggered at refining plants exacerbated the jump in prices at the pump. The core CPI, which excludes the volatile food and energy components, rose a more moderate 0.3%, still the fastest monthly pace in seven months.

The acceleration in prices on an year-over-year basis was even more pronounced. The overall CPI jumped 2.6% from a year ago, up from 1.7% in February; the core CPI rose 1.6% from a year ago, up 0.3% from the previous month. Ramping up vaccines, sending more stimulus checks, lifting restrictions early for indoor venues and sharp price deceleration a year ago contributed to those gains. Many prices collapsed at the onset of the crisis and are now normalizing.

The monthly increase in prices was broad-based. Every major category with the exception of apparel posted increases. The largest monthly increases outside of energy occurred in furniture, appliances, hotel rooms, car rentals, admissions to sporting events, vehicle insurance, checking fees and other banking services. The rise in the cost of furniture and appliances reflects the ongoing strength of the housing market and bottlenecks in the global supply chain. Plants are easier to close and halt than to ramp up after being idled. The jump in hotel rooms, car rentals and sporting event prices reflects the unleashing of pent-up demand for spending on travel and entertainment. Fees on banking services jumped while an even higher percentage of middle and higher income households saved their stimulus checks.

Federal Reserve officials have warned for some time that they will look through a temporary flare in price levels tied to the unleashing of pent-up demand and easier year-on-year comparisons. The worst of the trough in prices during 2020 occurred in April and May, which guarantees that inflation measures will accelerate even more on a year-over-year basis over the next two months.

The Fed’s goal is to allow as rapid and as safe a recovery from the pandemic as possible. Sadly, the latter is being challenged by a pickup in COVID cases tied to more contagious variants and the temporary suspension of the one-dose Johnson & Johnson vaccine. The FDA is investigating concerns that it may trigger a rare kind of blood clot.

Bottom Line
Bottlenecks, the ongoing strength in the housing market, the pent-up demand that is being unleashed by ramping up vaccinations and easy year-on-year comparisons all contributed to CPI gains in March. Measures of inflation will look worse before they get better. Most of the increases should abate as we get into the fourth quarter. The Fed is willing to wait out the next six-to-nine months, as long as employment is still lagging, on the bet that price increases will be temporary.

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