The debate of the moment in financial markets and regarding the direction of monetary policy centers around inflation: Is it a risk to the economy? The data and our forecast imply that while prices are rising in a cluster of industrial ecosystems that make up roughly 20% of the economy, we do not expect a sustained increase in overall prices.
We agree with the Federal Reserve and expect that volatility in prices will continue for some time and then begin to move back toward long-term trends that are consistent with the central bank’s 2% inflation target.
A closer look the CPI
So what does the data say? April’s Consumer Price Index increased by 0.77% compared to March. That pushed the headline inflation rate to a 4.2% yearly rate. This is mostly a function of base effects, or the distorted comparisons to the depressed prices of a year ago, during the depths of the pandemic.
It’s unlikely that the Federal Reserve will change its accommodative policies at this point, despite inflation reaching above its 2% target, however. That is a good thing because rising interest rates, lower equity prices and rising unemployment are not wanted by anyone at this point in the recovery.
As our analysis shows, food prices contributed only 6.9% of the 0.77% overall increase in CPI. Energy prices contributed a 0.9% decrease in overall CPI, dropping lower after last month’s notable increases. The bulk of the overall CPI increases were created by increased prices of just a few non-food and non-energy items and services.
For example, used cars, which were in short supply, increased by 10% in April, and that gain was responsible for 35.9% of the monthly increase in the overall CPI.
Although prices for information technology equipment (computers and phones) increased by 3.6% in April, that contributed only 1.7% to the increase in the overall CPI. Lodging away from home increased by 7.65%, which accounted for 8.9% of the overall CPI increase, but these prices are still way below what was normal before the pandemic.
If there is a concern for the monetary authorities, it is that the rent of shelter (the cost of living in a house or an apartment) increased by 0.4% in April. That contributed 16.9% to the overall CPI. Extraordinarily low interest rates have contributed to a hot real estate market, while shortages of lumber have pushed construction costs higher.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.