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Inflation: Transitory Factors Collide with the Base Effect


We are in our second week of shocks from the economic data: first with the miss from ISM Manufacturing on supply chain disruptions, then the miss from Nonfarm Payrolls and now a higher-than-expected rise from Core CPI. While all three have caught the market off-guard, it is important to remember that we closed the economy for two months in 2020 in addition to rolling closures throughout the last twelve months. This makes for a large mismatch in timing, creating massive bottlenecks and thus extremely volatile data – and for this week, a collision of factors within the inflation report.

The Consumer Price Index rose 0.8% this month and is up 4.2% YoY while the Core CPI number rose 0.9% this month and is up 3% YoY. The “base effect” has been well communicated in the market and April recorded the largest impact from this effect. Recall that April 2020 was down -0.4%, this number “rolled off” and was replaced by a 0.9% increase, overall elevating the YoY print.



Additionally, four traditionally volatile components are responsible for the majority of the monthly increase while categories such as Owners’ Equivalent Rent (OER), which makes up one-third of Core CPI, was stable this month and Medical Services reported flat.

  • Car and truck rental rose 16.2% this month, 82.2% YoY
  • Airline fares rose 10.2% this month, 9.6% YoY
  • Used cars and trucks rose 10% this month, 21% YoY
  • Lodging away from home rose 7.6% this month, 7.4% YoY
  • Owners’ equivalent rent rose 0.2% this month, 2% YoY
  • Medical care services rose 0% this month, 2.2% YoY





To further support the view that pressures are transitory due to the economic reopening, we are starting to see prices rise at a slower pace within the Producer Price Index (PPI). Stages 1, 3 and 4 within intermediate demand rose at a slower pace in April while Stage 2 for intermediate demand declined 2.1%. We will continue to watch the early stages of the pipeline for signals that pressures are normalizing.




As we normalize and work through supply chain disruptions as well as the base effect, we will end the year above the Fed’s 2% target. Moving into 2022, we will continue to shed the impact of the base effect into the April-June 2022 time-period and normalize back to the 2% target level. Working through an economy that shut down completely, then reopened with massive amounts of liquidity and pent-up demand is going to take some time to smooth out. This will continue to create massive pockets of volatility in both the data and the broader market.



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