Consumer Price Index – Inflation as Expected

As expected, the CPI news release (April 2021) today shows significant inflation, as that has been the anecdote from almost everywhere. The surprise is just how much and how fast:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8 percent in April on a seasonally adjusted basis after rising 0.6 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 4.2 percent before seasonal adjustment. This is the largest 12-month increase since a 4.9-percent increase for the period ending September 2008.

Pent up and bottlenecked economy

The question is why this pace of increase or does this signal long-term problems. The most immediate causes relate to the re-opening of the economy. From MarketWatch:

The pace of inflation has surged after years of languishing at unusually low levels largely due to the rapid reopening of the U.S. economy.

Businesses can’t keep up in demand, a problem exacerbated by ongoing bottlenecks in the global trading system tied to the pandemic. Computer chips are especially in short supply and that’s held up production of new autos and other manufactured goods.

Americans are also rushing to dine out, travel or go far away for vacation, activities they shied away from during the pandemic. That’s also driving up prices at popular vacation resorts and other venues where people plan to congregate.

The first two reasons are pretty straightforward, but the third reason (pent up demand) is beyond question, even if this one is the most difficult to measure as it’s anecdotal and not enirely precise but we all observe it – everywhere is packed with people looking to get out and do something, anything. But the impacts are real and tangible as seen in the BLS data:

See full interactive (and drillable detail) here.

Apple and Gold as Market Barometer

Benzinga posted a very interesting comparison between gold prices and Apple Computer, as a measurement potential trend:

Gold investors have been waiting for this, The metal has been trending lower since August and after rebounding in April, it ran into resistance around $1,780. That put a halt on the rally…Now that resistance has been broken and a big move higher has been made….There’s a good chance it continues. With inflation here and a potential energy crisis on the horizon, a flight to safety has begun.

But the unexpected correlation: “One reason why the flight to safety has begun and gold is moving higher is the weakness in Apple Inc.” Apple has met resistance for months and the suggestion is that Apple, being so strong in earnings and organizational performance, yet underperforming as a security – could be a bearish signal overall.

Here is gold over the last year:

Now Apple:

Of interest as well, the gold backed digital asset PAXG over the last three months:

Optimism everywhere – as well as the expectation of inflationary pressures

A post in the Wall Street Journal last week reported pre-pandemic levels of consumer confidence and for good reason(s), “as more people received vaccinations, stimulus payments reached households and businesses more fully reopened.” Employment, stimulus, an opening economy, vaccinations – all very compelling and obvious drivers to an overall feel of things, as well as the continued disucssion of inflation and how this will shape policy choices in the mid to long-term.

The University of Michigan Surveys of Consumers shows a consistent trend (with the next update in two weeks):

The survey adds the following commentary on inflation the finds support for either direction with:

Each side in the current policy debate finds support in the consumer data. The recovery is far from complete as less than half of the fall in consumer sentiment has so far been recovered, and the current and prospective stimulus and infrastructure spending has the potential to spark a renewed inflationary psychology, although that will not occur immediately…

Inflationary psychology preceded actual inflation by about two years in the last bout in the 1970s. The key balance is not to underestimate the ultimate impact of those policies on jobs and inflation, and not to overestimate the ability of policies to bring any excesses to a painless soft-landing.

Similarly, in the May 1 Berkshire annual meeting Buffett noted on the one hand the last 20 plus years, “was not a highly inflationary period as a whole,” but what they are seeing is:

…very substantial inflation. It’s very interesting. We’re raising prices. People are raising prices to us, and it’s being accepted. Take home building. We’ve got nine home builders in addition to our manufactured housing operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, just every day they’re they’re going up. And there hasn’t yet been because the wage stuff follows. The UAW writes a three-year contract, we got a three-year contract, but if you’re buying steel at General motors or someplace, you’re paying more every day. So it’s an economy really, it’s red hot. And we weren’t expecting it.

When asked in the Q & A his thoughts on the worry of “more inflation or that we will have a pretty dramatic fiscal monetary collision,” Buffett diplomatically answered, “we don’t know.”