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Weekly Economic & Financial Commentary: Reopening Comes with a Steep Price Tag


United States: Reopening Comes with a Steep Price Tag

  • The leap in consumer prices this week laid bare that challenges in meeting soaring demand come with a cost.
  • There were few signs of the mismatch between supply and demand beginning to come back into balance. April retail sales were unchanged following the second-largest monthly increase on record in the prior month. Meanwhile, difficulty finding workers appeared to grow more acute, with job openings and the share of small businesses with a job hard to fill soaring to record highs.
  • Next week: Housing Starts (Tuesday), Leading Economic Index (Thursday), Existing Home Sales (Friday)

International: U.K. Economy Getting Back on Track

  • U.K. March GDP data showed the economy starting to get back on track as GDP rose 2.1% month-over-month, reflecting gains in both services and industrial output. That said, U.K. GDP did fall for Q1 overall, with the decline concentrated in private demand, and government demand showing relative resilience.
  • Next week: China Retail Sales & Industrial Output (Monday), Japan GDP (Tuesday), Eurozone PMIs (Friday)

Interest Rate Watch: Inflation Expectations and the Fed

  • CPI inflation in April turned out to be significantly higher than most analysts had expected. Although one data point does not a trend make, many market participants expect that inflation will be higher in the coming years than it has been in recent history.

Topic of the Week: Fuel on the Fire

  • In the latest surprise to price pressures, the cyber attack forcing the shutdown of the Colonial Pipeline over the weekend sent gas prices soaring this week and many motorists scrambling to top off.

U.S. Review

Inflation Has Arrived

The message from last week’s data was that the extraordinary pace of economic growth could be even stronger right now if supply could actually meet the tremendous onslaught of demand. This week’s data laid bare that such an imbalance comes at a cost: inflation. The Consumer Price Index jumped 0.8% in April and is up 4.2% over the past year. Excluding the volatile food and energy components, prices soared 0.9%—three times the amount expected and the largest monthly increase since 1981. Over the past three months, core CPI is rising at a 5.6% annualized pace, indicating price growth has picked up materially over just the past few months.

Booming demand is giving pricing power to businesses, and allowing them to pass on higher input costs. Nowhere was this more evident in April than in the auto sector. Semiconductor shortages have hit the sector particularly hard, leading to cutbacks in new production, a booming used car market and an inability for rental car companies to replace fleets. A 10.0% monthly jump in used car and truck prices alone accounted for more than one-third of April’s CPI increase. But prices for discretionary services largely forgone in the pandemic, like air travel, hotels and sporting events, also leapt. More small businesses reported raising prices in April than at any point since 1981.

Consumers’ inflation expectations are rising in response, with the University of Michigan’s measures of both short- and long-term expectations leaping to the highest levels since the spring of 2011 in the preliminary May report. As we discuss in our Interest Rate Watch section, inflation expectations affect actual inflation, and could buoy price growth even after current supply constraints fade.

There does not appear to be much letup in sight. U.S. producer prices rose 0.6% in April and are up 6.2% year-over-year. Costs for energy and “core” input goods eased in April, but food-related input costs picked up. Notably, service-related inputs, particularly for transportation, advanced more quickly in April. Staffing challenges seem to be becoming increasingly acute as well, implying upward pressure on labor costs at the same time businesses are paying more for parts and materials. Job openings catapulted to a record high of 8.1 million in March, while the share of small businesses reporting at least one position as hard to fill rose to the highest in the series’ nearly 50-year history.

However, there were small hints that demand for goods, at least outside the auto sector, and supply are taking baby steps toward becoming more balanced, even if supply constraints are likely to linger for months to come. Total retail sales were flat in April following an upwardly revised 10.7% surge in March that was fueled by a