A woman wears a face mask while shopping for a baby shower gift during the Covid-19 pandemic at Madison’s niche boutique in Huntington, New York on April 21, 2021.

Alejandra Villa Loarca | Newsday | Getty Images

There’s probably less than April’s surprising inflation rate suggests, as goods hit by a variety of temporary influences have driven core price hikes at the fastest pace since the Reagan presidency.

Headline inflation rose 4.2% yoy, while core prices excluding the volatile food and energy sectors saw their largest one-month increase of 0.9% since 1981.

The cause of the increase was pandemic-related issues, both in terms of the aggressiveness of the current recovery and the bad things a year ago.

There were factors like supply chain congestion that added pressure. At the same time, an aggressively recovering economy depressed airline ticket prices (up 10.2% in April), hotels (8.8% higher) and used car prices (up 10%).

Meanwhile, the things that drive inflation over longer periods of time, such as the cost of housing and the price of services, have shown increases in line with the passing of time. Housing costs rose broadly 0.4% in April, while non-energy services rose 0.5%.

Overall, the narrative that the inflation spike so many projected will be temporary is likely to continue – at least for now.

“The more persistent categories of inflation (services and rents specifically) have been relatively minor over the past month, but commodity prices have increased, as have transportation and travel,” wrote Eric Winograd, senior economist at AllianceBernstein. “Neither of these moves is likely to continue. Over time, this means that as the supply side of the economy catches up with the demand side, inflation is still likely to settle down.”

Still, the numbers were staggering.

For headline inflation, this was the fastest year-over-year increase since September 2008, just before the economy fell off a cliff due to the financial crisis. And the consumer price index numbers came on the same day the AAA reported that gasoline prices topped $ 3 a gallon nationwide for the first time in about seven years.

Federal Reserve officials have repeatedly reassured the public that the impending surge in inflation is largely due to transitory factors and skewed comparisons with the economic stalemate a year ago.

What could change

All in all, economists were inclined to join the Fed, but the latest CPI numbers were significantly higher than Wall Street expected, and not least served as a reminder of how unpredictable things are now.

“The Fed is likely to continue to oppose the strength led by temporary price increases, but data for the coming months will be important in measuring the persistence of large price increases,” Citigroup economist Veronica Clark said in a note. “As the data releases so far in April have shown, there is considerable uncertainty about the inflation path and all economic data in the coming months.”

The market has seen some notable surprises lately, with the Friday payroll shocker serving as an even bigger shocker than the CPI numbers. This makes retail sales an even bigger deal this Friday, especially given the inflation picture.

Inflation, as Fed Chairman Jerome Powell has often pointed out, is largely a game of expectations.

According to the central bank, the collective belief that inflation will either stay low or high becomes a self-fulfilling prophecy and it becomes the job of the Fed to steer policy in the right direction.

Collective expectations have been low for at least a decade.

However, if readings like Wednesday become commonplace, if consumers continue to see stories of sold-out gas stations and car sales delayed by months due to semiconductor shortages, or if growth generally accelerates beyond current high expectations, the inflationary picture may turn in a change hurry.

“The fact is that if we take into account all of the monetary and fiscal stimulus that have been delivered (or are about to come), at least in the short term, the Covid crisis is likely to be a net inflation event,” wrote Rick Rieder, chief investment officer for Global Fixed Income at wealth management giant BlackRock.

“The risk of overheating in multiple areas of finance and real assets is becoming increasingly realistic for future policy, as some have suggested, and without further development of previous policies that respond to economic emergencies, the risk of this will only increase,” he added added.

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