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Inflation Still Sizzles

RFP
The consumer price index (CPI) edged up 0.3% in April, after surging 1.2% in March. The CPI rose 8.3% from a year ago, only a bit cooler than the 8.5% pace of March. We and the Federal Reserve have been careful not to declare March a peak in inflation, despite harder comparisons versus a year ago. There is too much uncertainty to go there given the ongoing war in Ukraine and ripple effects that lockdowns in China could still have on supply chains.

Energy prices cooled a bit and fell 2.7% from the red hot pace of March in April, but have already moved up again. Europe is attempting to cobble together an embargo of Russian oil while the pipeline that supplies much of Europe through the Ukraine has been at least temporarily disrupted.

Food at home surged another 1% in April after moving up 1.5% in March. Prices at the grocery store are now up nearly 11% from a year ago, the hottest pace of food inflation since spring 1979. The acceleration was broad-based but gains in proteins - meat, poultry, fish and eggs - surged at both a month-to-month and an annual pace. Proteins surged 14.3% from a year ago, also the strongest pace since 1979, although they topped 20% annual gains during the first four months of that year.

Food away from home also picked up after decelerating a bit earlier in the year. The gains are not as large as they are for food at home, but still hot. Food away from home surged 7.2% from a year ago in April, the fastest pace since 1981. Gains were greater in full service than fast-food restaurants. The lack of workers returning to offices was apparent with prices for food at employee sites and schools down 30% from a year ago.

The staffing problems are so acute for full-service restaurants that many are curbing hours and cordoning off parts of their dining rooms. Those shifts are making it hard to get into hot spots.

The core CPI, which strips out food and energy prices and more closely tracks prices the Federal Reserve can directly influence, jumped 0.6% in April. That is twice the subdued pace of March and underscores why the Federal Reserve is hesitant to declare a peak in inflation. A slowdown in housing related durable goods prices and a drop in apparel prices during the month weighed on the overall index. The exception was men’s suits, which have skyrocketed in costs, as many businesses collapsed during the pandemic. Core CPI was still up 6.2% from a year ago, only slightly below the 6.5% pace of March.

A drop in used car prices was welcome news but partially offset by a surge in new vehicle prices. The pivot from goods into services continued. Airfares, rental cars and hotel room rates all gained ground with a later-than-usual Easter and surge in spring break travel. Bookings for summer vacations have also picked up.

One of the most important increases during the month was in shelter costs outside of accommodation. Rents and homeownership costs both accelerated during the month. Rents jumped 0.6%, the same as homeownership costs. Rents and homeownership costs were both up 4.8% from a year ago. That is the hottest pace for rents since the late 1980s and the hottest pace for home ownership costs since the early 1980s.

Worse yet, much of the surge in shelter costs - the largest single component of the CPI - are still ahead of us. It takes at least a year for an acceleration in rents and homeownership costs to show up in inflation measures; both were still accelerating in the first quarter.

Medical care services rose 0.5% in April and were up 3.5% from a year ago. A return of elective surgeries delayed by the pandemic, acute staffing shortages, and a potential tsunami of long COVID cases and health problems overlooked during the pandemic are pushing up medical costs and expected to continue to do so in the months to come.

Bottom Line
Inflation remained remarkably resilient and broader based in April as consumers pivoted from big-ticket spending on goods to services - by at least a half percent - at the next two meetings. The consensus within the Fed to move well above what they once considered neutral - 2-2.5% - has also firmed in recent weeks.

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