The Inflation Battle Is Far From Over

Today’s Points

  • US April CPI could have been much worse, so stocks rallied to all-time highs;
  • It also could have been much better, so treat the rally with caution;
  • Real retail sales are back down to their post-financial crisis trend;
  • King Dollar hasn’t abdicated, but he’s looking a bit weaker;
  • AND Great news on presidential debates; they’re reliably compelling.

Calmer on the Inflation Front

There was white smoke over the Bureau of Labor Statistics, sort of, on Wednesday morning. The key measures of consumer price inflation for April confirmed expectations for a slight decline, and alleviated growing anxiety over a possible reacceleration. Risk assets across the world spent the rest of the day exhaling deeply.

The numbers could easily have been worse, and after a month in which prices had discounted growing risks of inflation the direction of travel on markets made total sense. Plainly bond yields should come down a little in these circumstances, while equities are reinforced. It is, however, reasonable to question whether these numbers were any kind of a turning point in the battle against inflation.

To start, this beautiful chart generated by Bloomberg Economic Analysis breaks CPI into four major components; food, fuel, other goods, and other services. Two years ago there were major shocks to the prices of goods, food and energy, all of which have now dissipated. That’s why inflation is much lower now. The problem is that services inflation remains stubbornly high, and accounts for substantially all of headline inflation at this point: