Commentary Directory

CPI: From Transitory to Elevated to Persistent

Jacob Hess
April 12, 2022

The March CPI inflation report did not disappoint with a strong 1.2% MoM increase to an annual rise of 8.5% YoY. Most subindexes did not see any significant growth acceleration and even the used vehicle component saw a -3.8% MoM softening. In fact, the sole culprit for the surge in headline inflation was the Energy index (as expected) which surged 11.0% MoM.

Energy goods prices grew 18.1% MoM, and energy services prices grew 1.8% MoM. Food also experienced a solid increase of 1.0% MoM, but it was in line with what we saw in February. Both were relatively expected. The surprise of the report was the monthly increase in core inflation (ex food and energy) of just 0.3% MoM, the lowest since September 2021. This might have been driven by a -0.4% MoM decrease in the prices of goods (ex food and energy) which likely was driven by the drop in used vehicle prices mentioned above. Services prices were a bit hotter with a 0.6% MoM increase, but the annual gain sits at just 4.7% MoM.

As we close the first quarter of 2022, the inflation narrative has shifted again. The first stage of post-pandemic inflation narrative was the "transitory" narrative in the beginning of 2021 where the relaxation of restrictions was expected to bring on pent-up demand that would translate into demand driven inflation. Goods prices were expected to overshoot a bit, and services prices, which crashed during the pandemic, were expected to snap back into place. Supply chain disruptions brought about the next stage, that inflation would be more "elevated" than previously expected. Prices in both Q3 and Q4 2021 continued to rise on the pent-up demand, but supply chain disruptions stuck around and accelerated increases in goods prices.


The third stage has the Federal Reserve alarmed and ready to move aggressively in the remaining FOMC meetings in 2022. The narrative, as a result of geopolitical tensions and rising inflation expectations, has turned to "persistent." The monthly gains in the CPI report have been elevated for some time, especially in core CPI. The 5-month moving average of monthly changes of core CPI exceeded 0.5% in Q3 2021 and again in Q1 2022. The last time the average reached this level was in 1982.

"Persistent" inflation is forcing the Fed to move swiftly and strongly in rising the Fed funds rate with many expecting a 50 bps hike in May. The bond market has also responded with a rise in short term interest rates that has caused the yield curve to flirt with inversion. This new narrative has demanded a more serious position on price stability from policymakers which has negative implications for US growth.