Prices Rise on Higher Airfares, Gasoline Prices

The Consumer Price Index (CPI) rose 0.3% in April, driven by outsize gains in gasoline prices (other energy prices dropped during the month), airfares and, to a lesser extent, new and used cars. Food prices also picked up as the effects of the drought out West and late start to the planting season in the Midwest pushed up prices of everything, from meat and dairy products to fresh fruit and vegetables. Restaurants and bars in California scrambled to get limes, which have skyrocketed in price, for Cinco de Mayo celebrations that include consumption of margaritas. The rise in prices at the pump and at the grocery store is a particular problem for cash-strapped households already living paycheck-to-pay check.

The late occurrence of Easter and the push by consumers with cash to migrate to sunny locales during Spring put additional pressure on airfares. Higher vehicle prices have cost producers in terms of actual sales in April; prices are poised to fall farther as dealers clear what are still crowded dealer lots. The competition on prices from Japan and Korea is also intensifying, which is likely to result in further sweetening of incentives on new vehicles. This is in addition to discounting that has already begun by apparel retailers, who were among the hardest hit by winter storms and now are stuck with spring merchandise that needs to be cleared for summer apparel.

Separately, shelter prices rose at a more moderate pace for the month, while health care and prescription drug inflation remained relatively stable. Prices for household furnishings remained unchanged during the month, reflecting the ongoing weakness in housing.

Bottom Line: Inflation is accelerating, but for all the wrong reasons in all the wrong places. Gains in prices are more related to weather distortions, shortages and geopolitical tensions with Russia rather than an economy that is heating up from within. This will remain a concern for the Federal Reserve when the board meets again in June. The CPI rose 2% on a year-over-year basis in April; that equates to about a 1.5% increase in the more accurate personal consumption expenditure (PCE) measure of inflation, which the Fed would like to see at 2% or slightly above. Goldilocks is still eating porridge that is too cold.

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