Annual Inflation Rate Decelerates Due to Base Effects, but Price Pressures Continue to Pressure Consumers

Key Takeaways:

• The Consumer Price Index (CPI) rose 0.3 percent in April, according to the Bureau of Labor Statistics (BLS). On an annual basis, the CPI was up 8.3 percent, a deceleration of two-tenths from last month’s report due largely to more favorable base effects. Energy prices declined 2.7 percent due primarily to a 6.1 percent drop in gasoline prices, though electricity and utility piped gas services posted monthly increases of 0.7 percent and 3.1 percent, respectively. Excluding food and energy, core CPI rose 0.6 percent, its fastest rate since January, equating to a 6.2 percent annual increase. Airline fares increased a massive 18.6 percent, while prices for lodging away from home increased 1.7 percent in April. Rent was up another 0.6 percent and owners’ equivalent rent increased 0.5 percent, the largest monthly gain since 2006. Annually, combined shelter costs increased 5.1 percent, the fastest rate since 1991.
• The Producer Price Index (PPI) for final demand of goods and services rose 0.5 percent in April, the smallest monthly increase since September 2021, according to the BLS. On an annual basis, the PPI rose 11.0 percent, a deceleration of five-tenths from March, but still the second highest reading on record. Final demand for energy increased 1.7 percent over the month and food prices were up 1.5 percent, a deceleration of 4.7 and 1.0 percentage points, respectively. Final demand for services prices were flat. Core PPI (less food, energy, and trade services) increased 0.6 percent over the month and 6.9 percent annually.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index was flat at 93.2 in April, remaining at its worst level since April 2020. At only 1 percent of respondents, the percentage of firms planning to increase inventories hit its lowest level since March 2019 when excluding the COVID-induced shock. On net, negative 50 percent of firms expect the economy to improve, the lowest level on record. The percentage of firms raising selling prices was down 2 percent to 70 percent and firms raising worker compensation declined 3 percentage points to 46 percent. The percentage of firms planning to increase prices and wages in the future also declined. Still, a record 32 percent of firms rated inflation as their single most important problem, up 1 percentage point from March.
• Consumer (non-mortgage) credit outstanding increased by $52.4 billion in March, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $31.4 billion and is less than $3 billion short of its pre-pandemic level. Non-revolving credit (largely auto and student loans) increased by $21.1 billion.
• The Federal Reserve Board Senior Loan Officer Opinion Survey in the three months ending in April showed an easing of lending standards for all residential loan categories except subprime. However, there was a significant drop-off in reported demand for the third consecutive quarter, though an increase in demand for Home Equity Lines of Credit (HELOCs).

Forecast Impact:

The CPI and PPI both decelerated on an annual basis in April, consistent with our forecast for slowing annual inflation as base effects become more favorable. However, the details of both reports offered little evidence that underlying inflationary pressures are easing in a substantial way. The headline CPI number was helped by a decline in gasoline prices, which have since hit a record high in May, so this relief is likely to reverse itself in the next report. Further, even when excluding airline tickets and lodging costs, core CPI increased 0.4 percent in April, largely due to an acceleration in shelter costs. This paints a bleak picture for consumers. Combined with the falling saving rate, we believe the March increase in revolving credit debt outstanding, which was the largest since 2006, signals that consumers are dipping into savings and utilizing credit cards to cope with higher prices and declining real incomes. This trend is unsustainable in the long term. Therefore, without sustained relief from rising food and energy prices (which is becoming increasingly unlikely as the war in Ukraine continues), we expect personal consumption growth will slow considerably this year.

The NFIB survey showed that inflationary pressures from small business price and wage increases may no longer be accelerating, but the results still point to upward price pressure. We continue to believe the Fed will maintain its course of 50-basis point rate hikes in its next two meetings, based on these reports. The effect on the mortgage market is clear, as loan officers reported significantly less demand for residential mortgages in the past three months, consistent with our forecast for declining home sales and lower mortgage originations this year amid a much higher mortgage rate environment.

Nathaniel Drake
Economic and Strategic Research Group
May 13, 2022

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