US service inflation taking over from goods – Benjamin Jones


“The consensus was for April’s US CPI print to come in lower than March. It did, but not by as much as expected, coming in at 8.3% versus 8.5% in March.

Marginally softer inflation can be explained by base effects; April 2021 saw sharp price rises, and some goods inflation easing. However, service inflation such as airfares and public transportation are now exhibiting the fastest price increases. “This was always going to be the case, but service inflation rising so rapidly and goods inflation not falling so quickly makes for an uncomfortable inflation backdrop.

“Food inflation also features high on the list of fastest price increases and will exacerbate the real income squeeze on lower income households. What this also tells us though is that consumers seem happy to spend on services and companies believe demand conditions are strong enough to raise prices. Used car prices have been a focal point of the inflation story in the last year as the chip shortage caused supply constraints and rapid price increases there. Despite representing a small weight in the index, the size of the increases meant an outsized impact on inflation.

“Those price pressures are thankfully now easing. Used car prices have fallen over the last two months and the falling Manheim Used Vehicle index implies further easing in that component in the coming months. More good news for drivers is oil, and therefore gasoline, prices fell in the month of April, albeit from high levels. This will be a mild relief as the summer driving season gets underway.

We think it likely March did mark the peak in US inflation, but April CPI figures suggest that the decline in inflation will not be as fast as the market hopes. The hope was that April’s CPI print would quieten the debate around a 75bps Fed hike in the coming months. Unfortunately, that debate will remain alive and well for another month at least.”

Benjamin Jones, Director of Macro Research at Invesco 

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