April Inflation Reports

Estimated reading time: 4 minutes

World’s Tiniest Ice Cube

Here’s the good news: CPI came in slightly lower than expectations on a month-over-month basis, and bang-on for expectations year-over-year. After four straight months of upside surprises, this was a welcome report, and the market agreed by lifting the S&P to a new all-time high.

More good news: when we look at how much each component is contributing to overall inflation, on average, most items are back down to their pre-pandemic contribution levels (note: this is different from their absolute price levels, which are still elevated relative to pre-pandemic readings). The only two components still contributing much more are shelter and auto insurance.

Contribution levels matter because they help us understand what’s driving the headline numbers. Some of this information is also what’s been used to “explain away” higher-than-expected CPI reports over recent months — in other words, there’s not really a big problem if the number is only driven by a couple components.

A fair argument, as seen in the chart above.

Here’s the bad news: Prices haven’t come down across the board. The drivers of overall inflation are getting back in line with a more “normal” environment, but we’re all still paying more for most goods and services than we were pre-pandemic.

The other bad news is that most people have to pay for auto insurance and shelter. Perhaps this isn’t a real problem for Americans sitting with sub-4% mortgages, but it is a real problem for younger generations who we need to drive our future economic growth, and for Americans who have seen rent costs rise dramatically over the last few years.

Margin Game Strong

Although CPI data will steal the headlines for the week, it’s been a mixed bag of inflation data with the Producer Price Index (PPI) for April showing hotter-than-expected data. The PPI measures average selling prices received by producers (including retailers) whereas CPI measures the prices paid by consumers.

In essence, they should measure mostly the same things from different perspectives, yet the data frequently tells different stories. Some people consider PPI a better representation of economic activity and CPI a better representation of consumer activity.

Understanding that the consumer makes up roughly two-thirds of the US economy, it’s obviously an important factor, but it is curious that PPI data is sending a hotter signal than CPI data.

This could mean a number of things, and the one I would focus on most in the near-term is the possibility that hot PPI and cool CPI could result in corporate margin pressure. In order to preserve margins, consumers either need to keep absorbing high and rising prices, or levels of aggregate demand need to increase.

Given recent reports of consumers pulling back, trading down, and answering sentiment surveys with notably less glee, the likelihood of buying more stuff at still higher prices seems to be dwindling.

Markets see this week’s inflation reports as decidedly positive for the time being. I see them as a mixed bag that is unconvincing of a victory.

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