• At the root of the April inflation surge were issues related to the pandemic, both in terms of how aggressive the current recovery is and how bad things were a year ago.
• The narrative that the burst in inflation will be transitory likely holds up – at least for now.
• But the latest CPI numbers served, if nothing else, as a reminder of how unpredictable things are now.

There is probably less than meets the eye from the startling inflation pop in April, as goods impacted by a variety of temporary influences pushed core price increases at the quickest pace since the Reagan presidency.

Headline inflation rose by 4.2% from a year ago, while core prices excluding the volatile food and energy sectors got their biggest one-month bump of 0.9% going back to 1981.

At the root of the increases were issues related to the pandemic, both in terms of how aggressive the current recovery is and how bad things were a year ago.

There were factors such as supply chain congestion that added to the pressures. At the same time, an aggressively recovering economy pushed prices for airline tickets (up 10.2% in April), hotels (8.8% higher) and used car prices (up 10%).

While that was happening, the things that drive inflation over longer periods, like housing costs and the price of services, showed increases consistent with where they've been over time. Shelter costs broadly increased 0.4% in April while services excluding energy rose 0.5%.

In all, the narrative that the burst in inflation that so many had been forecasting will be transitory likely holds up – at least for now.

"The more persistent categories of inflation (services, and rent specifically) were relatively tame last month, but goods prices surged, as did transportation and travel," wrote Eric Winograd, senior economist at AllianceBernstein. "None of those moves are likely to be persistent. Over time, that means that the most likely course of events is still for inflation to settle down as the supply side of the economy catches up to the demand side."

Still, the numbers were jarring.

For headline inflation, it was the fastest year-over-year gain since September 2008, just before the economy fell off a cliff due to the financial crisis. And the Consumer Price Index numbers came the same day AAA reported that gasoline prices eclipsed $3 a gallon nationally for the first time in about seven years.

Federal Reserve officials have repeatedly assured the public that the coming inflation push is largely a result of temporary factors plus distorted comparisons to the economic shutdown of a year ago.

What could change

Economists on balance have been inclined to side with the Fed, but the latest CPI numbers were considerably higher than Wall Street had expected and served, if nothing else, as a reminder of how unpredictable things are now.

"The Fed will likely continue to be dismissive of strength led by transitory price increases, but data over the coming months will be important for gauging the persistence of strong price increases," Citigroup economist Veronica Clark said in a note. "However, as April data releases so far have highlighted, there is substantial uncertainty around the path of inflation, and all economic data, in coming months."

The market has had several notable surprises lately, with Friday's nonfarm payrolls shocker serving as an even bigger shocker than the CPI numbers. That makes this Friday's retail sales figures an even bigger deal, particularly with the inflation picture.

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

In the central bank's thinking, the collective belief that inflation either will stay low or remain high becomes a self-fulfilling prophecy, and it then becomes the Fed's job to massage policy in whichever direction is desirable.

For at least a decade, collective expectations have been low.

But should readings like Wednesday's become commonplace, if consumers continue to see stories about sold-out gas stations and car orders delayed by months due to semiconductor shortages or if growth broadly should accelerate even beyond the current lofty expectations, the inflation picture can change in a hurry.

"The fact is that when we factor in all the monetary and fiscal stimulus that's been delivered (or shortly will be), the Covid crisis seems likely to be a net inflationary event, at least in the near term," wrote Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock.

"The risk of overheating in multiple places across the financial and real asset arenas is becoming more and more of a realistic challenge for future policy, as some have suggested, and without an evolution of what heretofore has been policy reacting to emergency economic conditions, the risk from this will only grow," he added.

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