US: Consumer Prices Were High, but in Line With Expectations
After a week of price indices coming in higher than market expectations the Consumer Price Index, while high, played a note with the tone the Federal Reserve wanted. The Fed still has the upper hand in inflation.
Consumer prices increased by 0.4 percent during April at the headline level, while increasing by 0.2 percent at the core level. Both numbers were in line with market expectations so there should not be a big market reaction due to these numbers. The only potential issue is that the core consumer price index increased by a higher rate than the 0.1 percent rate recorded in March. These results put the headline rate of inflation at 3.2 percent, while the core rate increased by 1.3 percent during the year ending in April.
As expected, a major contributor for April’s headline 0.4 percent increase was the energy sector, with all types of gasoline increasing by 3.3 percent after increasing by 5.5 percent during the previous month. Gasoline prices are up by an impressive 33.1 percent compared to April of last year and this is making a large dent in consumers’ pockets. At the core level, the largest contributor to the 0.2 percent increase in prices was a strong 1.2 percent gain in used cars and trucks. This was the second consecutive month of very strong increases in this sector. Used car and truck prices increased by 0.8 percent during March of this year and are up by 3.3 percent on a yearearlier basis, but used cars are not the only ones making a move. The price of new cars has increased by 1.0 percent, 0.7 percent and 0.7 percent during the last three months to an annual rate of 2.4 percent.
What does this report tells us regarding the ability of different sectors to push prices higher in the economic recovery? Consumer prices are a great indicator of which sectors of the U.S. economy are succeeding in raising prices, and potentially profits, and what sectors have been having issues with passing higher costs into consumers.
Energy related sectors, the automobile industry, medical care commodities, transportation services and medical care services are prime for improving their profitability or at least minimizing their losses due to higher input costs. They have been able to pass part or all the increases in costs onto the consumer. Furthermore, an inflationary environment is defined as an environment when firms, in general, have the ability to pass higher input costs to the consumer. This is what is happening today in the U.S. economy.
Those who say that consumer demand is not high enough to allow firms to pass higher costs onto consumers are probably watching a different episode of the “Great U.S. Economic Reflation.” This does not mean that inflation is becoming entrenched or a problem for the Federal Reserve, it only means that the Federal Reserve has been successful so far in reflating the U.S. economy. The only thing the Fed has to secure is that, as they say, this reflation is transitory. We will see!
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