New Data: Everything’s Up

The CPI was up in April, with the core rate rising 0.3%. The 12-month change in the core CPI is therefore up 1.8%, another sign that the US inflation rate is still rising. Just a few months ago the 12-month core CPI inflation rate was only 1.25%. (By the way, the reason that I like to use the core CPI is because it’s less volatile than the full CPI, and thus better reflects the underlying inflation pressures in the economy. However, the full CPI does a better job of depicting what’s happening to real purchasing power.)

Meanwhile the Fed’s monthly estimate of industrial production shows a healthy rise in April, too. The same data release shows that capacity utilization is also up, to its highest level in 3 years. The rise reflects increases in both manufacturing and in other industrial activities.

Finally, interest rates are also up, though they seem to have leveled off over the past week or so at their highest levels in about 2 years. The 10-year bond now yields around 4.8%, and the 5-year bond yields around 4.0%. Both of these interest rates are about 1 full percentage point higher than 2 months ago.

These are all classic signs of solid economic growth. The recovery is indeed in full swing.

The question of sustainability is still an open one, though. Will housing prices peak and start to fall? Will the impetus provided by tax cuts and government spending wane in coming months? Will consumers slow their spending as interest rates rise and house prices fall? (See Karsten’s post below for more on this.) Will the price of oil cut into the recovery this summer? I’ve been answering yes to all of these questions for a while, and I don’t see any reason to change my answer yet. I don’t think that anything dramatic will happen, but I do think that all of these forces will have some effect, and that the economy will noticeably cool later this year.