Inflation Confirmed

How inflation can change behavior: we intended to return
this leased car next March but are seriously considering
exercising our fixed price option to buy it.

Just last Saturday we voiced our fears about a return of '70's inflation:

The economy is warm if not hot, the Administration is proposing $trillions in additional spending, and the Federal Reserve is promising to keep rates low.

I hoped I was wrong, but today's CPI data confirms that inflation is back, at least for this year. [bold added]

The Labor Department reported its consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% for the year ended in March. Consumer prices increased a seasonally adjusted 0.8% in April from March. The index measures what consumers pay for goods and services, including clothes, groceries, restaurant meals, recreational activities and vehicles.

Higher prices for used autos surged 10% in April compared with the prior month—the largest monthly increase on record. That accounted for more than a third of the increase, the Labor Department said.

U.S. stocks fell after the inflation data was released, extending pressure on financial markets. Investors are concerned that rising prices could prompt the Federal Reserve to move on interest rates sooner than expected.

Policy makers are watching April’s reading to gauge the extent of what many expect to be a monthslong rise in prices, after a year of anemic overall inflation as the pandemic curbed consumer spending. Whether an upswing in prices proves temporary is a key question for financial markets and the U.S. recovery, as the Biden administration, Congress and the Fed continue to support the economy with fiscal- and monetary-policy measures.

The so-called core price index, which excludes the often-volatile categories of food and energy, climbed 3% in April from a year before.

The Treasury and the Federal Reserve are behaving as if the surge in prices is temporary, while many stock market participants worry that it will be long-lived, as evidenced by the sell-off today.

There are numerous reasons why inflation and higher interest rates are bad for the market. Here are just a few: companies pay higher materials, labor, and interest costs, decreasing their profits; investors switch out of equities into bonds, which are safer and return cash in the form of interest; valuation models lower the value of future dividends due to higher discount rates.

In this environment I think it's crazy for the Federal Government to be considering a multi-trillion dollar infrastructure program when the economy is already struggling with higher raw materials costs and labor shortages. If there are people who are left behind and still can't find jobs in this hotter economy, go ahead and help them, but limit the additional spending to these transfer payments, please.