How Long Will ‘Transitory’ Inflation Last?

The US Consumer Price Index surged in April, topping estimates by a wide margin. The question is whether this is the start of an inflationary wave or just the latest run of noise?

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Reliably answering that question will take several months at the least, but if we ignore that caveat the numbers for last month certainly look worrisome. Let’s start with core CPI, which strips out the food and energy noise, a filter that helps identify the underlying trend. On this basis, the monthly surge in core CPI is an extreme outlier: the 0.9% increase in April is the highest since inflation was raging 40 years ago. That could be a sign that the jig is up and pricing pressure is heating up to the point that the old paradigm no longer applies. But outliers can also be one-time shocks that are mostly light and heat. Outliers, by definition, after all, aren’t usually indicative of the trend. Unfortunately, we don’t yet know which applies and so caution is still recommended for reading too much in one number.

Filtering out the monthly noise paints a less severe trend, but even here the year-over-year results stand out. The 3.0% rise is the highest in nearly 15 years.

Taking the two charts at face value makes it easy to conclude that the inflation genie is out of the bottle. No one can dismiss that possibility and yesterday’s numbers raise the odds that hotter inflation is more likely than previously thought. But it’s also a mistake to see the April report as a smoking gun that cements the worst-case outlook for inflation. As anyone who traffics in economics data more than casually understands, one monthly macro report (or even two or three) can easily mislead us.

One reason is that economics data is revised, sometimes dramatically. There’s also an added complication in 2021: the pandemic effects on the economy are unprecedented in modern times and so analysts are still grappling with unusually noisy numbers. Recall that it was just a week ago that the April payrolls report was sharply weaker than expected: jobs increased 266,000 last month, a world below the expected 1-million gain.

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Disclosures: None.

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