Return Of Inflation Or Pandemic-Era Blip?

Despite official assurances, investors reacted sourly to the unexpected Consumer Price Index numbers.

According to data released in mid-May, U.S. consumer prices increased at a faster pace than at any time since 2008 in the 12 months leading up to the end of April. On May 12, the government reported a 4.2 percent jump in the Consumer Price Index from a year earlier. This apparent spike in inflation exceeded the expectations of most economists.

Higher prices were seen for a variety of consumer goods across the economy, including computers, vehicles, clothing, groceries, and gasoline. While this is not necessarily a bad thing overall — inflation is typically a marker of a growing economy — inflation does decrease the purchasing power of the average consumer over time. In addition to seeing higher inflation in real prices, a separate report from the Federal Reserve Bank of New York found that consumers’ expectations for inflation were also at their highest levels in nearly a decade. 

The Fed survey indicated that Americans expect the inflation rate will be at 3.4 percent in a year, far higher than the long-term 2 percent rate generally targeted by the Fed in recent years. Of course, consumer expectations of future inflation will not necessarily match the actual inflation rates we see in the months and years ahead, but these expectations are nonetheless significant, because the expectations of individuals and businesses can actually themselves be sources of inflationary pressure.

If prices keep climbing, the Federal Reserve might be tempted to sharply lift interest rates, a perennial concern of investors and politicians. Central bank officials and economists were mostly optimistic, however, and felt that temporary, pandemic-driven trends were responsible for the surprising inflation numbers.

“This is one data point,” the Fed’s vice chair, Richard H. Clarida, said to the New York Times shortly after the new inflation data was released. While Clarida acknowledged that April inflation numbers were a “surprise” and stressed that the Fed would remain vigilant, he also noted that supply may be simply taking some time to catch up with demand given that the economy is reopening across the country. Indeed, part of the reason for the steepness of the increase in prices compared to a year ago was the fact that prices tumbled initially when state and local governments first implemented stay-at-home orders in the opening weeks of the coronavirus pandemic.

Despite official assurances, investors reacted sourly to the unexpected Consumer Price Index numbers. Stock prices tumbled, and yields on government bonds soared. By the end of the week, stock prices had recovered somewhat, although the dollar also began edging lower against other major currencies. 

Most experts agree with the Fed that inflationary concerns are overblown, and that the higher-than-expected price increases will fade. Yet, they also note the pervasive concern that the Fed has fallen behind on one of its core functions, keeping a handle on inflation, and the surprising nature of the April inflation gains feeds into that narrative. On a monthly basis, inflation was up by 0.8 percent, and with food and energy costs stripped out (food and energy prices can be particularly volatile), inflation rose on a monthly basis by 0.9 percent. Not including food and energy costs, the April numbers mark the largest increase in inflation on a monthly basis since April of 1982.

Time will tell whether inflation is back, or whether the surprising Consumer Price Index numbers are merely a blip caused by a once-in-a-century pandemic. For now though, investors seem to be taking inflationary concerns more to heart than government officials and financial industry insiders. Fed officials have been clear that they will tolerate just the kind of reopening inflationary bump that it seems we are seeing without boosting interest rates, in part because inflation has actually been too low for much of the past decade based on the Fed’s 2 percent benchmark. Additionally, we are still quite some distance from maximum employment as the Fed sees it, based on a disappointing employment report showing slowed job gains in April. The Fed has signaled it is not inclined to increase interest rates until there is some major progress toward employment goals.

For now, there is a marked increase in inflation. How long that will last, and whether it will ultimately affect interest rates, remains to be seen.


Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.