Inflation came in hotter than expected in March, closely-scrutinized data out Tuesday showed.
Headline CPI rose 0.6% MoM, versus estimates of a 0.5% rise.
The YoY print, expected at 2.5%, was 2.6%. Core rose 1.6% YoY, slightly more than expected (figure below).
“Don’t extrapolate,” TD’s Jim O’Sullivan cautioned. “Base effects will boost the YoY data in April and May as well, but base effects will contribute to slowing again in later months,” he added, noting that on the bank’s view, the YoY pace for headline CPI will probably hit 3.7% in May, then fall to 2.3% by the end of the year. On core, TD sees the YoY pace hitting 2.5% in May before eventually declining below 2%.
The MoM rise on the headline gauge was the largest since 2012 (figure below).
The gasoline index jumped more than 9% in March. That accounted for almost half of the seasonally adjusted rise in the all items index.
That sounds like a big increase, and it is, but it’s not really anomalous (figure below). What’s more notable (if so obvious as to be barely worth mentioning) is the series of consecutive large monthly increases.
The monthly gain on the core index was 0.3%.
“We think that the housing components will be an increasingly important story over the next twelve months,” ING’s James Knightley remarked. “Primary rents and owners’ equivalent rent account for a third of the CPI basket [and] tend to lag 12-18 months below house price developments, which means that the housing components may well be the story to watch through the second half of this year,” he added.
Monthly increases for indexes of food and food away from home were small (0.1%). YoY, the food at home gauge rose 3.3%. A long-term snapshot gives you some context for the pandemic “spike” (figure below).
To the extent you could discern anything from the market reaction to the report, it was at least partially muddled by the almost simultaneous news that US health officials were halting vaccines with J&J’s shot. That dented risk sentiment.
The proximity of the long-bond sale (which went swimmingly, by the way) made it even more difficult to parse any follow-through.
Do investors look more at CPI or PPI?
Since the market is primarily interested in corporate profits, it seems PPI should be more relevant. Not only it is more closely related to gross margin, but a good portion of listed companies’ revenue is intermediate goods.
As for CPI, the heavy adjustments erode its credibility. Not just basket selection and hedonic factors, but the whole owners-equivalent-rent thing is a major departure from reality.
All that said, I’m in the camp that expects meaningful inflation in the coming years, no matter how you measure it. Supply chain stress, de-globalization, pent-up demand, lots of money sloshing around, labor market dislocations, and a Fed that actively wants inflation above 2% . . . seems a good bet.
There is much angst about “whatever will bond investors do”. One feels for institutional bond investors who actually have to hold investment grade bonds. For individuals, there is no law that says “thou shalt own LQD and IEF”. There’s high yield, municipals, floating-rate notes, TIPS, even good old fashioned CASH. After all, we’re not talking about forever. When IG bonds yield enough to make them worth owning, they can again be a leg of the portfolio.