Breitbart Business Digest: Core Inflation Went from Bad to Worse in April

The idea that we might be headed toward a “softish landing” was probably the great victim of the April report on the Consumer Price Index (CPI).

Consumer prices were up another 0.3 percent in April for a higher than expected 8.3 percent annual gain. The official consensus had inflation slowing to a 0.2 percent monthly gain and 8.1 percent over the previous 12 months. But many analysts, including those at Bank of America, were forecasting a 7.9 percent year-over-year gain, and there was talk that an inflation report that began with a seven-handle could spark a major stock rally.

Sure enough, stock futures showed the market was preparing for a substantial jump prior to the report’s release at 8:30 Wednesday morning. The theory ran something like this: If inflation had already dropped 50 or 60 basis points in April, after the Fed had hiked just 25-basis points at the end of March, then the central bank would not have to squeeze financial conditions too tight to restore something like price stability. Looser financial conditions would be good for stocks, especially the high-flying growth stocks that had led the market up in the previous two years.

No dice. Headline inflation came in just 20-basis points, despite a powerful base effect resulting from the fact that prices were already rising rapidly a year ago. While the monthly figure was down substantially, it was not down by as much as expected. Perhaps even more importantly, there were signs that underlying inflation strengthened in April, exactly the opposite of what was expected.

Let’s start with core inflation, which is CPI minus food and fuel. We jokingly call this “inflation minus essentials,” but there is a good reason why economists want to look past it to detect underlying price pressures. Gas prices, for example, can be quite volatile and are subject to manipulation both by the OPEC cartel and our own government’s policies. Food prices are also volatile and subject to idiosyncratic pressures that might not show up in the broader economy. Core prices were up 0.6 percent in April compared with the previous month, twice as much as the month before.

Inside core inflation, we see little evidence of an easing of supply chain problems. Furniture prices rose 1.5 percent, bringing the 12-month gain up to 15 percent. Tools and hardware were up 0.6 monthly and 11.2 annually. New vehicle prices climbed 1.1 percent for the month and were up 13.2 percent for the year. Somewhat offsetting these gains were declines in used car prices, apparel, and appliances—but only on a monthly basis. Compared with a year ago, prices on all of these are up sharply. On balance, though, core goods rose 0.2 percent for an annual gain of 9.7 percent, more than reversing the 0.4 percent decline recorded in March. So much for the idea that inflation peaked in March.

Part of the expectation for April was the idea that there would be a handoff from goods to services. Obviously, with core goods up, no such thing occurred. Instead, all we got was an increase in core services prices. These rose 0.7 percent in April, up from 0.6 percent a month earlier. Compared with a year ago, core services CPI was up 4.9 percent. Rents were up half a percentage point for an annual gain of 5.2 percent. Lodging at hotels and motels jumped two percent for an annual gain of 22.6 percent.

This sent the stock market plunging. The Nasdaq Composite dropped 3.18 percent, and the Dow Jones Industrial Average fell one percent. To put that in context, the Nasdaq is now down nearly 30 percent from its November high. For the Biden presidency, the Nasdaq is down by around 13 percent.

Maybe instead of talking about a soft-landing, people should start wondering when we’ll land at all. So far all we’re doing is falling.