In a companion CFE blogpost, we acknowledge that the supersized fiscal stimulus enacted earlier this year invites serious angst about accelerating inflation. We make the case that the inflation risks are less worrisome than many conventional economists make them out to be. That said, we certainly accept that such risks are there.
But the April CPI report, labeled a shocker by many, adds nothing to that debate. The price increases reflect recovery from COVID collapsed pricing of a year ago, along with some short-run shortage issues that say nothing about production capacity in the quarters ahead.
First things first. Imagine there was no COVID-19 collapse, spring 2020. Instead conjure a world in which modest expansion continued through April of 2021. In such a world, we might expect a continuation of pricing trends, with both the CPI and the core CPI climbing at about a 2% annualized pace April 2019 through April 2021. What was the actual pace over the two years? Both headline and core inflation rose at a 2.2% annualized pace, a hair above what one might have expected.
How can that be? We just learned that the CPI jumped by 4.2% over the past 12 months, its highest climb in a dozen years and, more worrisome, the core rate jumped by 3%. But the 12- month advance through April of 2020 was very depressed—reflecting the economy in freefall. As the table below makes clear, the headline CPI rose little at all, and the core rate advanced at only 1.4%. Thus, the average price today is not high, relative to where one might have expected it to be before COVID-19 hit. It simply got there via a swoon and a jump.
Of course, within the report we can see violent swings, an inescapable result, given the unprecedented disruptions set into motion by the global pandemic. Look no further than energy prices. Down nearly 20% for the 12 months through April 2020. Up a bit more than 20% through April of this year. Netting to a tame 1.5% annualized climb. Hotel rental rates? Up by 8% this April, but still down nearly 10% from two years ago—more recovery for these prices is all but certain.
And then there are used car prices. The world has a temporary microchip shortage. Auto output is depressed, globally. U.S. Federal Reserve production data pegs the year-to-date slide at 10%. Rental companies, usually sellers of cars, are buying used cars. Used car prices, April 2021, are roughly 20% higher than where one might have expected them to be, in late 2019. But microchip production will almost certainly rebound, and, in turn, motor vehicle output. If that unfolds, falling used car prices, later this year, are a real possibility.
Will the stimulus put in place in March of this year generate too much of a good thing? Will the jobless rate fall to levels that elicit big wage increases, reactive price hikes and a wage/price spiral, amid an unhinging of long-standing anchored inflation expectations? Though we are wagering the answer is no, we acknowledge that the debate is legitimate. But it is clear the April 2021 CPI report offers us no guidance on the question.