Understanding The Significance Of The April CPI Inflation Data
What does this mean for the economy moving forward?
Inflation began to tick down slightly in April, with a CPI inflation reading of 8.3%, higher than the 8.1% expected. This is compared to 8.5% in March, the highest in decades. What does this mean for the American consumer, the economy, and the Federal Reserve? Let’s dive in.
Year-over-year inflation increased 8.3%, meaning that since last April, the price level in the economy is up 8.3%. This means that for an individual making $60,000 per year, buying food, groceries, clothing, and other needed items, is now $4,980 more expensive than it was last year.
Month-over-month inflation increased 0.3%, with 0.2% expected. This means that since March, prices increased 0.3%, giving us an annualized inflation raise 0f 3.6%. This is much better than what we got last month, which was a 1.2% increase in month-over-month inflation, mainly due to the oil price shock.
Core CPI, the preferred metric of the Federal Reserve that measures the inflation rate minus food and energy costs, was up 0.6% in April, after only being up 0.3% in March. This is a cause for concern for the Federal Reserve, which we will discuss shortly.
Airline fares, eggs, milk and other dairy products, oranges and other fresh fruits, margarine, and baby food saw some of the sharpest increases in prices in April, which is why we came in higher than expected on CPI. Airline fares are most likely rising due to the fact that oil prices are still elevated, and fares are often based around how expensive it is to fuel the plane.
Core CPI increasing faster than expected is a cause for concern. It was believed that inflation was being driven up by potential food shortages and the oil price shock caused by the war in Ukraine, and that Core CPI would be low. This turned out not to be entirely true, as this metric shows prices for goods and services outside of food and energy are still rapidly increasing, and that the Federal Reserve may have to get more aggressive with their rate hikes. This is not good news, as the only good news we got today is that inflation finally started to move down, albeit very slightly.
The Federal Reserve has committed itself to at least 50 basis point increases at the next 2 FOMC meetings, leaving 75 basis points on the table. Currently, according to CME Group, there is an 85% chance of a 50 basis point interest rate increase and a 15% of a 75 basis point increase at the next FOMC meeting. If we continue to get bad news regarding inflation, the Federal Reserve will be forced to raise 75 basis points, potentially sending shock waves throughout the stock market.
Higher interest rates creates an economic environment of slower growth, as business are not able to borrow at low rates, making investments more risky. Many consumers will continue to struggle to make ends meet as long as prices increase quicker than their wages. The Federal Reserve will need to act quicker than they currently are to bring down inflation, which is becoming increasingly obvious. While stock prices will most likely continue to fall the more aggressive the Fed is, this will have to be a short term consequence of inflation.