Inflation Cooled In April, But...

Inflation as measured by the Consumer Price Index (CPI) slowed in April after rising at the fastest pace in the last 40 years in the 12 months ended March – which sent the 12-month CPI inflation rate to a whopping 8.5% annual rate. The government reported yesterday that the CPI for April rose only 0.3% last month after surging 1.2% in March. For the 12 months ended April, the CPI inflation rate was 8.3%.

While that sounds a little better, it comes with some caveats. Even though the headline CPI number for April came in at a much lower 0.3%, this was in large part due to the “calendar effect,” in that a large monthly increase in April of last year rolled out of the 12-month window.

This helped to bring down the CPI average slightly over the last year.

Second, the US rate of inflation has exceeded the rate in most other developed nations over the last year, despite the slowdown in April. Most economists attribute this big jump in US inflation to the fact that the government has implemented several large stimulus spending programs which weren’t needed and resulted in much higher inflation.

So here we are, with the highest inflation in 40 years, with gas, grocery prices and other things we all buy every month soaring. Many Americans are comparing the latest rise in inflation to what we saw in the 1970s, but most economists argue it is even worse this time around. I agree. Here’s why.

Inflation today has risen far more quickly than it did in the 1970s and taken most Americans by an unhappy surprise. Inflation began at 5.5% in 1970 and hovered near that figure in the early and mid-70s – before culminating at 14% in 1980.

As an example, let’s look at gasoline prices today versus the 1970s. In 1970, the average American paid $0.36 for a gallon of gas. That soared to $1.19 a gallon by 1980, a decade later. Inflation-adjusted to today’s prices, gas went from $1.72 a gallon in 1970 to $2.95 a gallon in 1980, a 72% rise. The point is, this took a decade to happen.

On Tuesday, gasoline prices rose above the previous record of $4.23 a gallon, up from a recent low of $1.94 a gallon in 2020, according to the US Energy Administration Office. Not counting Tuesday’s rise, that’s a 117% jump in the span of just two years. Inflation has jumped higher and faster this time around than in the 1970s.

Making matters worse, the recent rapid rise to record-high inflation came as much more of a shock to the average person, who has no prior experience to draw on. Many American consumers today were either not alive in the 1970s or were too young to be concerned about rising prices.

Also, so much of today’s inflation is self-inflicted by our political leaders. They were forewarned that the extra stimulus packages they unleashed were not necessary and would be inflationary. We have had historically low levels of inflation for the last 20-plus years.

On top of this, the Trump administration succeeded in making the US energy independent. The US had become a net exporter of oil for the first time in the Modern Era by the time President Trump left office in January 2021.

By comparison, in the 1970s, the Organization of the Petroleum Exporting Countries (OPEC) took the US by surprise when the Mideast oil cartel suddenly decided to exercise its leverage and raised gas prices significantly. Many of us are old enough to remember gasoline shortages and long lines at the pumps back then.

Prompted by the liberal green energy contingent of the Democrat party, the Biden administration made the proactive decision to cancel the Keystone pipeline in the US as its first order of business – its first step away from US energy independence. Other steps followed. As a result, gas prices are more than double what they were less than two years ago.

On a different but related note, President Biden announced for the first time last week that he definitely plans to run for re-election in 2024. Frankly, that surprises me – not only because of his consistently rock-bottom approval ratings but also why does he think he has any chance of winning with inflation at the highest level in 40 years.

By the way, the Democrats’ response to Biden’s announcement about running for re-election was not favorable overall. Some Dems even let it be known they don’t want Biden to run again. They want someone younger, fresher, with new ideas and a real chance to beat the Republican challenger in 2024.

Who that challenger may be is still far from clear. Most Democrats think it will be Donald Trump, but he has not announced he is running for sure. Personally, I wish Trump would endorse someone who agrees with his pro-America (MAGA) and pro-economy policies – and not run again. But that remains to be seen.

To conclude, high inflation may be with us for a while regardless how the presidential race plays out. It really comes down to whether the Fed can thread the needle and whether multiple interest rate hikes can slow inflation without sending the economy into a recession.

No doubt it’s going to be an interesting rest of the year and a challenging time for the markets.