The April Inflation Report Was Worse Even Than It Looked

We better hope that April showers bring May flowers because last month we got drenched in inflation—and we could use a bloom of good news as we head into the summer months.

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Tuesday’s consumer price index (CPI) report was bad enough on the surface. Prices rose 0.6 percent in April, following March’s blistering 0.9 percent increase. Compared with a year ago, consumer prices were up 3.8 percent, a sharp acceleration from the 3.3 percent annual pace recorded in March.

The usual excuses were available. Energy prices did a lot of the damage. The energy index rose 3.8 percent in April and accounted for more than 40 percent of the overall increase. Gasoline prices climbed 5.4 percent on a seasonally adjusted basis and were up 28.4 percent from a year earlier. Food prices were also firm, rising 0.5 percent for the month, with grocery prices up 0.7 percent.

That would have been bad enough. But the trouble did not stop at the pump or the grocery aisle.

April’s Inflation Was Broad-Based, and Trend Inflation Was Strong

Core CPI, which excludes food and energy, rose 0.4 percent in April after increasing just 0.2 percent in each of the prior two months. The 12-month core inflation rate rose to 2.8 percent from 2.6 percent. Shelter, the largest component of the index, jumped 0.6 percent. Both rent and owners’ equivalent rent rose 0.5 percent.

This was not merely an energy shock dressed up as inflation. It was a broader firming in the price structure, perhaps with leakage from higher energy prices into higher prices of everything shipped with higher energy costs.

The Cleveland Fed’s underlying inflation gauges make the point even more clearly. Median CPI rose 0.4 percent in April, double March’s 0.2 percent increase. The 16 percent trimmed-mean CPI also rose 0.4 percent, likewise double the prior month’s pace.

These are the numbers that make it much harder to dismiss the possibility of higher inflation. We still do not think that higher energy costs can trigger sustained broad-based inflation without monetary accommodation allowing price pressures to spread. That’s not good news, however. It means that businesses are likely to feel squeezed when consumption runs up against too much spending being spilled at the gas station.

Median CPI and trimmed-mean CPI are designed to strip out the noisiest parts of the monthly report. They reduce the influence of extreme price moves, whether those are plunging used-car prices or soaring gasoline prices, and focus instead on the middle of the distribution. When headline CPI is hot but median and trimmed mean are calm, the Fed can plausibly argue that the problem is narrow. When median and trimmed mean jump, the problem is harder to dismiss.

In April, they jumped. At a monthly pace of 0.4 percent, these measures are running at roughly a five percent annualized rate. No one at the Fed can look at that and say inflation is safely on a path back to two percent.

That is what makes this report worse than it looked. The headline number was already unpleasant. But the underlying measures say the problem was not confined to a few volatile categories. The middle of the inflation distribution moved higher.

The Fed Will Watch with Worry

That matters enormously for monetary policy. The Fed can look through a one-month gasoline spike. It can look through a noisy jump in airline fares. It can look through temporary disruptions in particular categories. But it is much harder to look through a report in which headline inflation, core inflation, shelter, median CPI, and trimmed mean CPI all move the wrong way at once.

Until the start of the Iran war, the market has been waiting for confirmation that inflation was drifting back toward the Fed’s two percent target. March and April delivered the opposite. April in particular showed that the disinflation process remains vulnerable.

The report does not prove that inflation is spiraling. One month never proves that. But it does show that the comforting version of the inflation story has taken a serious hit. The best hope is that April was a storm month: war-driven energy prices, seasonal quirks, and shelter noise combining to make the report look worse than the underlying trend. But the Cleveland Fed’s numbers make that hope harder to hold. The whole point of median and trimmed mean CPI is to see through the storm.

In April, we got the downpour. May had better bring flowers.