KEY DATA: CPI: +0.3%; Over-Year: +8.3%; Ex-Food and Energy: +0.6%; Over-Year: 6.2%/ Real Earnings (Monthly): -0.1%; Over-Year: -2.6%/ HWOL: +2.5%
IN A NUTSHELL: “Inflation may have peaked, but it is not coming down quickly.”
WHAT IT MEANS: Hoorah, consumer prices did not surge in April. That said, the details don’t tell me that inflation is going to decelerate sharply anytime soon. So, let’s go to the numbers. The major factor holding back the index was a big drop in energy costs, led by a six percent decline in gasoline prices. Unfortunately, we already know that has been reversed in May, so we can skip the celebration on gasoline. Apparel costs also tanked, and that may be more permanent. As the supply chain slowly untangles, more shipments reach our shores and that increases supplies. Of course, if China keeps shutting down parts of its country, we could see prices go back up, so hold the celebration here as well. Finally, used vehicle prices dropped. As new vehicle supply rises, so should used vehicle availability, so we could see continued easing in those costs. On the other hand, food prices jumped again. The war in Ukraine, coupled with bird flu should keep food costs from falling sharply anytime soon. With the prices of fresh cakes, cupcakes and cookies still rising at a near double-digit pace, I don’t feel there is any hope for inflation (but there is for my diet).
The more muted rise in consumer prices was good news for wage earners, but not good enough. The growth in hourly wages is moderating and with hours worked flat, weekly earnings, adjusted for inflation went nowhere in April. I suspect that the big gains in hourly worker incomes are behind us, though they should still be rising decently. Unless inflation decelerates faster, we are likely to see household spending power continue to decline, and that doesn’t bode well for sustained solid consumer spending.
Meanwhile, the labor market remains as hot as it can get. The Conference Board’s Help Wanted OnLine index jumped in April after having risen sharply in March. Over the year, the index is up nearly twenty-eight percent. That is a huge gain that shows that the demand for workers not only remains strong but may be accelerating. The pressure on wages is not going away anytime soon.
IMPLICATIONS:The inflation fire continues to burn out of control and there is little that policymakers can do to stop it, short of slowing growth massively. Unless you want wage and price controls, firms will continue raising prices and workers will keep demanding higher wages. Releasing oil from the strategic reserve may have some modest impact on energy prices, but unless OPEC expands supply and/or the Russia/Ukraine war ends, don’t expect energy costs to crater anytime soon. As long as bird flu rages and Ukraine’s agricultural sector remains under duress, food prices are not likely to fall sharply. If you think inflation is being driven by government spending, well most of the stimulus monies have been spent and the budget deficit is likely to be cut nearly in half this year. In other words, the factors that are driving inflation are not under the control of policy makers. Which brings us to the Fed. It was late to the party and it isn’t clear if it wants to make the decisive moves needed to slow the economy down enough to ease the demand pressures on prices. It seems to be willing to take its time getting to where it needs to be. That go-slow approach may limit the likelihood of a recession, but it would also sustain high inflation for an extended period. The alternative is to attack the demand side by raising rates sharply. But that approach risks throwing the economy into recession. The Fed has put itself between a rock and hard place and the likelihood the economy emerge unscathed is slim, at best.