The Fed “would not hesitate to act” in the event inflation were to surge, Richard Clarida said Wednesday, while fielding questions following a speech at an NABE conference.
Clarida said he was “surprised” by April’s CPI data and disappointed in last week’s jobs report. “We have pent up demand in the economy,” he mused. “It may take some time for supply to rise up to the level of demand.”
April’s inflation data came in considerably hotter than expected, which is saying something considering expectations were elevated. Headed into Wednesday, this week was all about the intensification of the inflation narrative. Core’s monthly rise was the largest in nearly 40 years (figure below).
Reactions varied. “Much of the strength in this report [was] driven by expected noisy components including used car prices, airfares, and hotels,” TD’s Jim O’Sullivan wrote, noting that “prices for OER and rents rose by just 0.2%, which continue to show some firming from recent low prints, but do not suggest further acceleration.”
ING’s James Knightley wasn’t as sanguine. “We are not as optimistic as the Fed in thinking this is purely ‘transitory’,” he said Wednesday, citing a “booming” economy fueled by stimulus and reiterating that on the bank’s view, economic output “will end the year higher than it would have if there had been no pandemic and the economy had instead continued along its 2014-19 trend.”
He also cautioned that movements in primary rents and owners’ equivalent rent generally come on a 12- to 18-month lag, which “means the housing components may well be the story to watch through the second half of this year.” The figure (below) illustrates the point.
Expect this debate to continue indefinitely. Base effects will, by definition, fade and while you could argue that supply disruptions and bottlenecks won’t be easily resolved, you’ll need to pick different words. A “disruption” isn’t a “disruption” if it’s permanent. Jerome Powell half-jokingly made the same semantic argument last month vis-à-vis “bottlenecks.”
In a separate note, TD’s Mazen Issa wrote that Fed officials have “made it clear in no uncertain terms that they will look through transitory factors [so] the question is whether today’s CPI print really matters.” Issa noted that “equity markets have been the main arena through which the inflation scaries have been observed.”
That’s a nice segue into one final quotable, this one from SocGen’s Kit Juckes, who on Wednesday wrote that “there’s more debt in the US and global economies than there was in 2006 and just because the madness isn’t in the credit market doesn’t mean there aren’t some outlandish asset valuations out there.”
What does that mean? Well, for Juckes, it means it’ll be difficult for the Fed to “get rates above the last peak, let alone the pre-GFC one, without causing harm.”
supply chain for labor is disrupted as well as for goods. this cpi print makes the next several ppi and cpi prints critical for the financial markets. problem here is that often booms are shortly followed by busts. so for all the experts out there- my money is on powell and the fomc…. powell is not going to stumble into tightening early and face whiplish from a bust.