The Devil And The Deep Blue Sea: Managing Inflation

The big news last week was that the inflation reading from the CPI report not only surpassed all expectations, it was the largest positive surprise on record. The headline number rose 4.2% in April from a year ago and the core number (less food and energy costs) rose 3%. Most notable about all of this, perhaps, is the fact that inflation has already made up for its shortfalls last year and is now running faster than its pre-pandemic trend. Thus the recent surge is clearly more than just a result of the low base numbers from a year ago.

This would seem to validate the comments from many corporate executives lately like those from Kellogg CEO, Steve Cahillane: “We haven’t seen this type of inflation in many, many years.” More than just a statistical quirk resulting from, “base effects,” inflation has returned in way not seen in a long time. Representative of this fact is core inflation’s gain of 0.9% in April from March, the fastest monthly increase since 1982.

The Fed would like us to believe these trends are, “transitory,” and will not last more than a few months. However, as my friend Peter Atwater tweeted last week, “At the end of the day, it is far less important whether the Fed thinks inflation is transitory than whether the crowd thinks inflation is transitory.” In other words, what will actually determine whether inflation is transitory is not fedspeak but inflation expectations.

The reaction of consumers to the shutdown of the Colonial Pipeline last week due to cyberattack is emblematic of how this works. Fearing gas would not be available, many individuals rushed to fill up their tanks, resulting in long lines and mass outages reminiscent of those from the 1970’s. When tanks were full, some started filling gas cans and even buckets and plastic bags. This led to a much more serious shortage than if consumers had simply bought only what they needed.

Should this sort of mindset spread to a variety of other goods and services you can bet that inflation will prove more than just a “transitory” phenomenon. In this vein, it was rather interesting to see Google searches for the term “inflation” recently soar to a record high (in data going back to 2004). Similarly, the University of Michigan survey showed consumer expectations also rising at the fastest rate on record. This would seem to suggest that consumers are indeed becoming more worried about rising prices in a more general sense.

Beyond cyclical inflationary forces, it is also notable to see the wider acceptance of the secular inflation narrative. James Mackintosh, in a piece for the Wall Street Journal titled “Everything Screams Inflation” that ran well before last week’s CPI report was released, wrote, “We could be at a generational turning point for finance. Politics, economics, international relations, demography and labor are all shifting to supporting inflation.”

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Disclosure: Information in “The Felder Report” (TFR), including all the information on the Felder Report website, comes from independent sources believed reliable but accuracy is not ...

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