As I wrote in my last article, the CPI data for April was good news for markets and the Economy alike, however, a closer look might reveal that this might be due to a swing in food and energy prices, instead of an elimination of the core causes of inflation.
The Core CPI which excludes food and energy prices was at 3.7% unchanged from last month, in contrast to CPI which fell by around 0.7 percent to 4.9%. This means that the decrease in CPI might be due to the volatility of these markets, and this decrease might not mean that the Fed is done with hawkish policy.
Also, we should consider the strong labor market and the fast increase in wages, one of the main causes of inflation.
Taking this into consideration, I don't think that the inflation problem is resolved yet, and I also think that investors are overly optimistic about the fight against inflation. The PPI data which will be announced on May 13 is crucial to judge this, as high PPI is generally passed on to CPI. If the PPI does not have a significant decrease like the CPI, that would support the argument that this decrease in inflation is not sustainable and the Fed should get the job done with more hikes.
I will keep you updated on the PPI data.
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