KEY FACTS
- Overall prices rose 0.8% from March—far higher than the 0.2% economists were expecting, while the core price index, which excludes volatile energy and food prices, rose 3% over the last year—nearly twice the 1.6% figure from March.
- The Wednesday figure marks the highest annualized inflation reading since a 4.9% increase in September 2008; economists were expecting a 3.6% jump in prices year over year and a 2.3% rise in core prices.
- Accounting for more than one-third of the overall price increase, the index for used cars and trucks rose a staggering 10% in April from March, marking the largest one-month increase since the Bureau of Labor Statistics started tracking prices in 1953.
- Last month, surging gasoline prices pushed overall consumer prices up 0.6%, representing their largest jump since August 2012.
- Federal Reserve chair Jerome Powell has repeatedly stated that the central bank is anticipating a short-term spike in prices as the economy recovers and that the Fed has the tools to deal with runaway inflation should it become a problem.
- U.S. stock futures, which were down slightly before the release, dipped lower immediately after the announcement, with the Dow Jones Industrial Average falling 187 points, or 0.6%, to 33,996, while the S&P fell 0.8% and the tech-heavy Nasdaq slipped 1.2%.
“The U.S. CPI figures for April are huge,” Vital Knowledge Media Founder Adam Crisafulli said in a Wednesday morning note. He expects stocks will see a "knee-jerk move" down before recovering by the end of the day. "Despite being very hot, the number really shouldn't change anyone's view... Base effects and a few one-offs (like used autos) are accounting for a lot of the inflation firming, [and] investors are already expecting price increases to occur—the debate is whether they are still gallivanting higher in the fourth quarter." Base effects refer to the fact that for the next several months, the annualized inflation figures in the CPI reports will be measured against historically low prices at the height of pandemic uncertainty last year. Annualized inflation hit a five-year low of 0.3% last April, and higher-than-usual growth this year is expected as prices normalize.
KEY BACKGROUND
Trillions of dollars in unprecedented government spending helped keep the economy afloat during the pandemic, but experts are worried that extra cash and pent-up demand could cause problematic inflation—and tank markets—once the pandemic subsides. Bank of America and Morgan Stanley are among the Wall Street investment banks that have warned inflation—and not the pandemic—is now the biggest risk to stocks. Stocks got a taste of the “worst-case” scenario for markets Tuesday, with mounting inflationary concerns resulting in the Dow’s biggest one-day loss since February. The Fed, meanwhile, insists it won’t ease up on its accommodative monetary policy until inflation is “consistently” at 2%, even if that means overshooting its target for a while. Wednesday’s report marks only the second month in a row with annualized inflation above 2%.
WHAT TO WATCH FOR
Policy. Crisafulli says the Wednesday report will make President Joe Biden’s lofty fiscal agenda “much more challenging” given that he’s proposed another $4 trillion in stimulus spending with his two new infrastructure plans. The Fed, meanwhile, is now much more likely to “at least acknowledge” a plan to begin reducing its level of economic support by the end of the year. Meanwhile, Nancy Davis, the founder of Quadratic Capital Management, says she believes the Fed is more focused on the employment part of its dual mandate. It wants to ensure the economy returns to full employment before easing up on its policy—something experts say may not happen until next year, at the earliest.