Hold the applause

"Everybody's desperate, trying to make ends meet;

Work all day, still can't pay the price of gasoline and meat.

Alas their lives are incomplete".

(Warren Zevon, Mohamed's Radio)

The prophet Zevon wrote those words almost fifty years ago, but they have been ringing very true in recent months, as soaring costs for fuel and food have pushed US consumer price inflation to multi-decade highs. Despite a strong real economy and rising employment, a majority of Americans give the Biden administration very poor marks for its handling of the economy. That's entirely due to inflation. 

This morning the Bureau of Labor Statistics released CPI data for April. On the surface, the data seem to offer a glimmer of hope that the inflation spike may have peaked. The year-on-year rise in headline CPI slipped marginally for the first time since August 2021, falling to 8.3 percent from March's 8.5 percent. The monthly change was only 0.3 percent, down from 1.2 percent in March.

So far, so good, but some of the details are less reassuring. A major contributor to the lower print was a 6.1 percent month-to-month drop in gasoline prices, but that has already been reversed in May. Indeed, the national average gas price has hit a new high this month, likely setting the stage for a fresh bounce in  overall CPI when the May data are reported. 

The year-on-year rise in core CPI, excluding food and energy costs, slipped to 6.2 percent in April from 6.5 percent in March, but the monthly change in this measure tells a different story: it rose 0.6 percent in April, twice as fast as in March. The rise in core CPI appears to point to broadening price pressures that have little to do with the well-publicized supply chain issues -- but even those may be set to become more severe again, given the return to COVID lockdowns in China. 

Purely for statistical reasons, there is a good chance that year-on-year headline CPI will decline very modestly in the next few months, as outsize monthly gains from 2021 fall out of the index. However, the rate of progress back towards the Federal Reserve's 2 percent target is likely to be agonizingly slow. Significant further tightening of monetary policy is all but certain for the remainder of this year.