U.S. Inflation Surges. Are Transitory Issues To Blame?

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On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Research Analyst Laura Bardewyck discussed the steep rise in U.S. consumer prices, the inflation outlook for the rest of the year and the market’s reaction to the April inflation report.

U.S. consumer prices soar amid supply-chain disruptions, bottlenecks

On May 12, the U.S. Labor Department announced that its consumer price index (CPI)—a key gauge of  inflation—jumped 4.2% during April on a year-over-year basis. Eitelman characterized the increase as quite significant, noting that on a monthly basis, the core CPI (which strips out prices from the volatile food and energy sectors) rose by 0.9%. “This month-over-month increase was the steepest in core inflation since 1981,” he remarked.

So, what’s behind the rapid rise? Unpacking the April CPI report further, Eitelman said that transitory issues appear to be the dominating factor. As an example, he pointed to the automobile industry, which experienced one of the sharpest rises in prices last month. “The increase in cost in both new and used cars during April was largely a result of the ongoing semiconductor chip shortage,” he stated, noting that he expects the issue to fade away over time. This is because semiconductor suppliers and car manufacturers both have strong profit incentives to continue boosting supply, Eitelman explained. He added that while temporary, the issue could still take several months to resolve.

Transitory issues are also at the root of the rapid climb in airfare and hotel prices, Eitelman said, noting that both rose by roughly 10% last month. “It’s important to remember that at the onset of the COVID-19 crisis, both of these sectors had absolutely no pricing power. There was simply no demand due to government-mandated lockdowns and restrictions,” he remarked. Now, with the U.S. economy aggressively reopening and travel picking up, these sectors are starting to regain some pricing power—but from exceptionally low levels, Eitelman explained. This is resulting in sharp month-over-month price increases, he said.

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