BLS and consumer price index: Inflation is real, and it's spectacular

“These are staggering numbers,” CNBC’s Rick Santelli, and while the direction was expected, the amplitude was very much a surprise. The Bureau of Labor Statistics reported an 0.8% jump in the Consumer Price Index for April, an annualized increase of 4.2%, far above expectations.

As Santelli explains, we’re comparing year-on-year from the first full month of COVID-19 shutdowns, so some upward pressure is normal under the circumstances. However, this looks more like actual inflation:

U.S. consumer prices surged in April as the economic recovery picked up, reflecting surging demand as the pandemic eased and higher prices due to supply bottlenecks.

The Labor Department reported its consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% for the year ended in March. That is the highest 12-month level since the summer of 2008. Consumer prices increased a seasonally adjusted 0.8% in April from March. The index measures what consumers pay for goods and services, including clothes, groceries, restaurant meals, recreational activities and vehicles.

Higher prices for used autos surged 10% in April compared with the prior month—the largest monthly increase on record. That accounted for more than a third of the increase, the Labor Department said.

The so-called core price index, which excludes the often-volatile categories of food and energy, climbed 3% in April from a year before.

NBC also cited supply issues while noting an even more stark record broken:

Consumer prices for the month of April rose the most since September 1981, an indication of soaring demand dovetailing with continued supply chain interruptions, according to the latest monthly data released Wednesday by the Bureau of Labor Statistics.

Surging demand? Definitely true, especially as compared to April 2020 for obvious reasons. Supply bottlenecks? Also true, as anyone who has done any grocery shopping knows. But that’s hardly the whole story, and the Wall Street Journal of all institution knows it. None of that explains why auto sales went up 10% over March.

However, all of the helicopter cash being dumped into the economy explains that, and more. The federal government and its continued stimulus spending and bailout programs have induced a “sugar high” of consumption. Even under normal circumstances, that would put upward pressure on prices as demand rises. Doing so while experiencing supply bottlenecks amplifies that effect. And the mass printing of money — as Congress essentially has asked the Federal Reserve to do with these unfunded multi-trillion-dollar packages — has its own inflationary impacts.

Politico’s Ben Smith sent up a warning flare even before the CPI report came out this morning:

Markets flash inflation warnings — The Fed doesn’t see it. The White House isn’t worried about it at all. But markets are clearly freaking out a bit about the prospect for higher gas prices, a potential sustained labor crunch and continued wide open fiscal and monetary policy to create an inflation shock.

The Dow tanked around 500 points Tuesday, not a huge deal at only 1.4 percent. But it came after another down day with other indices also dropping in the last several sessions. The risk of sharply higher inflation cutting into the economic recovery remains among the biggest risks facing President Joe Biden’s White House.

Via Brian Price, Head of Investment Management for Commonwealth Financial Network: “Given that equity markets are still in shouting distance of all-time highs it is not surprising to see investors hit pause and evaluate the various catalysts for the next move higher in stock prices. For the time being I think that investors may remain on edge until there is more certainty from Washington regarding fiscal policy.”

So what’s next? Higher interest rates, if not now then very soon, NBC surmises:

The Federal Reserve has kept interest rates at rock bottom lows, but were inflation to rise above its current 2 percent target, central bank officials could vote to increase its benchmark borrowing rate. That would mean a higher cost of lending, raising prices on everything from car loans to mortgages, during a time when both affordable cars and houses are in shorter supply. That could threaten to trip up the nation’s economic recovery.

Indeed. This is why some economists warned about the passage of a third massive relief/stimulus bill in March without seeing how the second package played out. The late December bill’s spending hadn’t yet fully rolled out before Congress and Joe Biden demanded an addition two trillion off-the-books dollars. The risk of inflation eating at the recovery was obvious, but the politics of the giveaway was just too attractive in the short term to resist, even among some Republicans.

Investors are correct to be worried too, as Price told Smith. The Biden administration doesn’t have a fiscal-policy strategy, much like they don’t have a border-control policy or a plan on global vaccine distribution. Biden and his team have been entirely reactive, either relying on plans laid out by the previous administration or simply flailing otherwise. The Fed will have to act to bring inflation under control, especially with Biden pushing other massive spending packages using money that simply doesn’t exist.