Top-line inflation declined to 8.3% in April, down from 8.5% in March, as core prices, which exclude food and energy, rose by 6.2% from a year ago.
Core prices, which exclude food and energy, increased by 0.6% in April and were up by 6.2% from a year ago. Those costs where buttressed by a 0.5% increase in shelter and the policy-sensitive owners’ equivalent rent series. The former is now up by 5.1% from a year ago and the latter has increased by 4.8%.
The number that jumps out in the core data was the 18.6% increase in airline fares. In addition, the 1.1% increase in new vehicles induced some distortion into the series as the Bureau of Labor Statistics introduced a new methodology in estimating those costs in April.
Where there was improvement, it was inside the energy complex, which declined by 2.7% on the month, which followed the February and March price shocks of the war in Ukraine. Used car and truck costs declined by 0.4%.
Risks to the outlook
While inflation may have peaked, the twin shocks of the war in Ukraine and the reemergence of the coronavirus in China have the potential to prolong an increase in food and energy prices that will put at risk well-anchored medium- to long-term inflation expectations. These price shocks will have the greatest effect on lower-income households, reducing their propensity to spend and causing a slowdown in economic growth that will eventually affect all income classes and businesses. More important, gasoline prices are rising again and will almost certainly continue to do so until the summer driving season peaks around the July 4 holiday.
Perhaps more important, the 0.9% rise in food and 0.8% increase in food and beverages, which are up by 9.4% and 9%, respectively, have plenty of room to increase as the drop in exports from Ukraine and Russia affect prices this year.
It’s important to remember that American households tend to define inflation through food and fuel prices, so this data will be more important in the near term despite what will be an almost mechanical drop in top-line inflation as the data series moves away from supply chain shock-induced levels of a year ago.
Policy implications
The April inflation data underscores the sense of urgency at the Federal Reserve to restore price stability. In fact, this data will almost certainly set the stage for the Fed to push the policy rate up another 200 basis points to 3% this year from the current rate of between 0.75% and 1%. Unfortunately, this data reinforces the idea that the Fed can do little to nothing around the supply side issues and idiosyncratic risks to the inflation outlook. That leaves the Fed little choice but to drop the hammer of rising interest rates on American households that are still adjusting to a series of shocks over the past two years.The data
Energy and commodity costs declined by 5.4% in April while gasoline prices dropped by 6.1%, Apparel prices declined by 0.8%, education costs increased by 0.2% and commodities excluding food and beverage costs declined by 0.9%. Medical costs increased by 0.4% on the month and by 3.2% from a year ago. The service sector, which comprises most of the U.S. economy, experienced a 0.8% increase in April and was up by 5.4% from a year ago. Service sector prices excluding energy advanced by 0.7% on the month and were up by 4.9% year over year.
Inside the food complex, food at home jumped by 1% and cereal and bakery products were up by 1.1%. Meats, poultry, fish and eggs prices increased by 1.4%; dairy and related products advanced by 2.5%; and fruits and vegetables prices declined by 0.3%. Non-alcoholic food and beverages jumped by 2% while food away from home increased by 0.6%.
