Inflation! Stocks tank! Silly stuff, I think...

OH NOOO! Inflation’s back! And Wall Street panics!

U.S. stocks declined sharply on Wednesday, led to the downside by technology shares as key inflation data showed higher-than-expected price pressures.
The Dow fell 1.99%.
The S&P 500 was down 2.15%.
The Nasdaq tumbled 2.67%. https://t.co/GTTwZrAQtX pic.twitter.com/XcDfu7yjtn

— CNBC (@CNBC) May 12, 2021

U.S. stocks declined sharply on Wednesday as hotter-than-expected inflation data triggered massive selling, especially in technology shares.

The Dow Jones Industrial Average fell 681.50 points, or 2%, to 33,587.66, posting its worst day since January. The blue-chip benchmark tumbled as much as 713 points at its session low. The S&P 500 lost 2.1% to 4,063.04 for its biggest drop since February, while the tech-heavy Nasdaq Composite slid 2.7% to 13,031.68, bringing its weekly decline to more than 5%.

Inflation accelerated at its fastest pace since 2008 last month with the Consumer Price Index spiking 4.2% from a year ago, compared to the Dow Jones estimate for a 3.6% increase. The monthly gain was 0.8%, versus the expected 0.2%. Excluding volatile food and energy prices, the core CPI increased 3% from the same period in 2020 and 0.9% on a monthly basis. The respective estimates were 2.3% and 0.

Sounds like a big deal. Let's go to the CPI report and see what it says.

One big culprit in April’s big jump was used cars, which seem to have become strongly in demand as the chip shortage limits the amount of new cars that are available. But food also had a decent increase for April.

The index for used cars and trucks rose 10.0 percent in April. This was the largest 1-month increase since the series began in 1953, and it accounted for over a third of the seasonally adjusted all items increase. The food index increased in April, rising 0.4 percent as the indexes for food at home and food away from home both increased. The energy index decreased slightly, as a decline in the index for gasoline in April more than offset increases in the indexes for electricity and natural gas.

Another big increase has to do with the increase in travel that's happened as vaccinations have increased. Transportation services have gone up by 1.8% in March and 2.9% in April, including a 10% spike in airline fares last month. In addition, lodging away from home (generally hotels and motels) has gone up 3.8% in March and 7.6% in April, reflecting the increased demand that is likely to continue.

I will add that much of the large 12-month increase was predictable, because it starts from the low levels that prices were at in the first few weeks of the COVID World, when travel and many other economic activities had ground to a complete halt. Heck, I told you on this blog back in March what we were likely to see.

The “for some time” part of the equation is important because we will see some high year-over-year inflation numbers starting next month, as the lockdown-based deflation of prices comes off that 12-month clock.

So even if we get tepid increases of 0.2% in each of the next 2 months, the year-over-year amount will be at or above 3%, and I’d imagine there would be more voices asking for rate hikes (or at least fewer asset purchases) when that happens.

To be fair, 0.6% and 0.8% are notably higher than 0.2%. And so we do need to keep our eye on prices to make sure they don't continue to spiral upward as more places open up and more money continues to flow.

The better question is what it means going forward. If this is an odd three-month blip due to temporary shortages in the supply chain (which has been the general line from the Fed so far), then this will shake out over the Summer, and we will be back toward 2%-3% year-over-year increases, likely with a strongly growing economy running underneath.

But it certainly raises the stakes in the upcoming economic reports, as we will see if the higher prices scare people off and slow down the spending spree that private consumers and government have been on. Or we'll see if the prices keep rolling toward 5% year-over-year increases And if that does happen, I have a simple solution. Tax capital gains to head off home-flipping and stock Bubbles! And tax corporations so they are less likely to hoard the gains from these higher prices.

We’ll also see how much of this increased activity and price level is a sugar high from stimulus checks and reopenings, and how this settles as those one-time effects fade away. This is true in questions of both prices for products, and in hiring and paying wages for employees.