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Economic data released on Wednesday in the US showed the Consumer Price Index reached the highest annual rate since 2008 at 4.2%. Analysts at Wells Fargo, suspect that even as inflation has transpired earlier and to a greater degree than expected, the Federal Reserve will still want to see how the dust settles before reacting to inflation given the unique confluence of events and current state of the job market.

Key Quotes:  

“Consumer prices leaped 0.8% in April, the largest monthly gain since 2009. Yet unlike prior months when prices soared to such a degree, the rise cannot be chalked up to energy, or even food. Core inflation skyrocketed 0.9% in April, the most since 1981. Over the past three months, core inflation is up at a 5.6% annualized pace.”

“The recent strength in inflation comes down to two main causes: supply constraints and the reopening of the services economy. Price pressure is therefore bubbling for both goods and services, in contrast to most of the past 15 years when it was one or the other.”

“As sharp as April’s increase in consumer prices were, we do not think this will push the Fed off its current easy policy path. First, FOMC members have been adamant that the degree of price increases this year is likely to be “transitory.” Yes, prices are surging now as the economy more fully reopens, consumers have money to spend, and the supply side of the economy is having trouble keeping up. But inflation is a process, and current gains would need to be matched and exceeded for inflation to take off further from here.”

“As Friday’s jobs report showed, that is still likely to take some time. We expect the Fed to remain patient in adjusting policy as a result.”

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