Consumer prices rose faster than expected in April, the Labor Department reported Wednesday, sparking new worries about inflation in the U.S. economy.
The consumer price index (CPI) increased 0.8% in April relative to March, the largest monthly increase since 2009. Core CPI, which strips out volatile food and energy prices, rose by 0.9%, the largest increase since 1982. Over the last 12 months, consumer prices have increased 4.2% – the largest annual increase since 2008. Core CPI increased 3% on annual basis.
The results came in well above Wall Street expectations. Analysts knew the numbers would be big, since the economy is reopening rapidly and the annual comparisons would include the weak economy from a year ago, but the overshoot was substantial, about twice as high as expected.
Temporary pressure? Many economists expect inflation to rise in the short run as the recovery gathers strength, with supply and demand eventually shifting back to a more normal relationship. “Readings on inflation have increased and are likely to rise somewhat further before moderating,” Federal Reserve Chair Jerome Powell told reporters in late April. The Fed expects the inflation rate to climb above 2% over the next year, driven by a rebound in energy prices and consumer demand. “However, these one-time increases in prices are likely to have only transitory effects on inflation,” Powell said.
Or something more serious? Economists and investors were surprised by the price data, fueling concerns that inflation may be becoming a more serious and persistent problem. “How transitory is transitory?” Quincy Krosby, chief market strategist at Prudential Financial, asked CNBC. In some ways the price increases are a good thing, Krosby said, since they are the product of a rebounding economy. However, the Fed has said it wants higher inflation, but it’s not clear that the central bank can control it now that it has arrived. “Be careful of what you wish for,” he warned.
Either way, a political problem: The inflation report could undermine President Biden’s argument that the economy needs trillions more in federal spending, and gives Republicans another weapon in their fight against his ambitious proposals. Bloomberg’s Nancy Cook summed up the situation:
“Biden’s Republican opponents have seized on rising prices, the slower-than-expected pace of hiring and even growing fuel shortages from a computer hack of Colonial Pipeline Co. to compare his administration with the ‘stagflation’ era of former President Jimmy Carter. The specter of hours-long waits in lines to fill up with gas has only enhanced the parallel.”
Even before today’s inflation numbers, Republicans have cited inflation worries as a reason to oppose Biden’s agenda. “There’s so much money out there in the economy that the demand is high, and it’s outpacing supply and it’s starting to push prices up,” Republican Senator John Thune of South Dakota said before the report was released. “We need to be a little more cautious and restrained.”
Still, it’s not just Republicans who are concerned about the threat of inflation. Former Obama administration economist Jason Furman told Bloomberg that the report “bears some caution and should change the way people are thinking about the economy.”
“Your best guess has to be that it isn’t entirely transitory,” Furman said. “This is the type of thing that’s going to start to move those inflation expectations.”