Chart of the week

Inflation: Here today and gone tomorrow, or here to stay?

The inflation debate turns from speculation to reality. Our chart breaks down April’s CPI report and suggests one takeaway could be higher volatility.

May 14, 2021 | 2 minute read

Monthly change in CPI by component

Source: Bloomberg Finance, L.P., as of April 30, 2021. Based on data from the U.S. Bureau of Labor Statistics.

  • For much of this year, investor concerns surrounding inflation were purely speculative. However, April CPI data showed consumer prices rising 0.8% from a month earlier and 4.2% from a year earlier — the first month to show inflation indeed running significantly higher than expected.1
  • Aside from some volatility in the equity markets, though, the market reaction was largely muted. The 10-year U.S. Treasury yield moved higher but remains in the same range it’s occupied since mid-March. Market-based expectations for Fed rate hikes, meanwhile, are largely unchanged from a month ago.
  • Digging into the CPI data may reveal a potential reason for the muted market reaction: A notable part of the CPI increase may prove to be transitory. Used car and airfare prices both jumped 10% from a month earlier.1 Together with other COVID-sensitive areas (hotels and car rentals), these components account for only about 5% of the CPI but accounted for half of the monthly increase.1
  • The rise in used car prices could prove to be the short-lived result of supply-side bottlenecks in the new car market, while it seems likely that airfare hikes are the result of a post-pandemic reopening. Other areas of the CPI report, which might drive prices higher on a more sustained basis, remained modest. Shelter and owners’ equivalent rent, for example, rose just 0.2% from a month earlier.
  • With just one month’s data in hand, investors are left to speculate as to whether higher inflation is a passing trend or a sobering new reality. Whatever answer proves true, it seems fair for investors to prepare for further market choppiness, as the coming months are ripe for continued speculation.

  • Bloomberg Finance, L.P., as of April 30, 2021. Based on data from the U.S. Bureau of Labor Statistics.

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