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Month-Over-Month Core Inflation Surge is Probably Due to Lagged Effects

A 0.9% increase in core CPI reported yesterday is the largest since April 1982 but it may be due to lagged effects from 13-months ago. Further increase in inflation may require a sustained supply shock in energy and commodities.

According to U.S. Bureau of Labor Statistics, “the [CPI] index for all items less food and energy rose 0.9 percent in April, its largest monthly increase since April 1982.”

Month-over-month large changes may be due to lagged effects. In this particular case, the lagged effect is a quick recovery of the economy after a serious pandemic and collapse in economic activity. There is inflation but at this point it may be premature to declare a MoM change as persisting. As they say in social media – without understanding the technicalities- “it may be transitory.”

In order to see the lagged effect on core CPI, we may have to calculate the increase from the previous bottom in April 2020, when there was a -0.37% MoM change, as shown in the chart below.

It may be seen that although a 0.92% MoM change is the largest since 1980, the 13-month change is 2.6% and within “normal” levels, at least since the end of the high inflation period in the 80s.

By taking the 13-month change we have eliminated any lagged effects due to plunge in the MoM core CPI in April 2020.

Notice the similarities with the 80s and how after a -0.25% plunge in July 1980, core CPI rocketed MoM to 1.2% in December of same year and then to 1.35% by July 1981. These lagged effects were due to due to the Second Oil Crisis.

There is no oil crisis at this point (although the pipeline hack attack could be only a coincidence) and also no reactor accidents as with Three Mile Island in 1979 that further put pressure on energy prices. Between 1978 and 1980, the price of crude oil rose 250%. There are no comparable increases at this time in energy prices although other commodities may have gained.

Any hype about inflation getting out of control is premature in my opinion and any interest rate increase may push the economy in a deflationary spiral. However, if inflation keeps rising in the next three months, then we may see policy adjustments by the Fed.

Disclaimer:  No part of the analysis in this blog constitutes investment or trading advice. The past performance of any trading system or methodology or analysis is not necessarily indicative of future results. Read the full disclaimer here.

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