US Stimulus & Impact On Inflation

Some investors who don’t follow government inflation reports closely were surprised by CPI staying below 2% in February, but they shouldn’t have been. Firstly, we aren’t headed for hyperinflation or even high inflation above 5%. Secondly, the spike in CPI will come from the stimulus, reopening, and base effects. The stimulus just passed and the base effects don’t start until March. We will have higher CPI next month. The reopening should boost inflation sometime starting this spring or summer.

Monthly headline and core CPI were 0.4% and 0.1%. Headline matched estimates and rose 1 tick, while core rose 1 tick, but missed estimates by a tick. As you can see from the chart below, owners’ equivalent rent of residence inflation rose back to where it was in the last expansion.

Once we see overall shelter inflation firm, yearly CPI can rise above 3%. On a yearly basis, headline inflation rose 3 tenths to 1.7% which met estimates. Those who see inflation’s increase as being temporary are mocking those calling for a large rise in inflation. Don’t speak too soon because the rise in inflation hasn’t started yet. Finally, core CPI was 1.3% which was actually down 1 tenth (missed estimates by a tenth as well).

It’s common to hear complaints about groceries costing more while CPI stays low. In this case, the CPI report actually captured higher food costs. Food inflation was 3.6%. Limited service meals and snacks were up 6.3%. That will moderate when spending habits shift away from quick service meals towards dining. On March 19th, indoor dining in NYC will increase to 50% capacity. It has been a very slow process to get back to zero restrictions, but we’re almost there. This is the polar opposite of 12 months ago.

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