The CPI numbers came out for January showing a 0.7% decrease for the month. That is the third straight month in a row where the CPI decreased.
The craziest thing is that, year-over-year, the CPI is down 0.1% from January 2014. While I wouldn’t call a 0.1% reduction price deflation (it is more of a rounding error), it is significant that the inflation numbers have slowed so much.
To be fair, the median CPI is holding steady at 2.2% year-over-year. It is typically less volatile. In addition, energy prices are the main driving factor in the decrease over the last three months. We can see that just by filling up our cars at the gas pump.
I don’t like to rely too much on CPI numbers. I understand they are government-issued numbers. But we can use them to look at trends. We must also consider that analysts look at these numbers, including Fed officials.
The massive monetary inflation of the last 6 years has not translated into significant price inflation. Much of the new money has gone into excess reserves at the banks. Also, asset prices have been bid up, as we see new nominal highs in the stock market indices.
We shouldn’t be fooled by the low CPI numbers. The previous loose monetary policy of the Fed has misallocated resources on a grand scale, even if it isn’t translating into big price inflation.
The interesting thing about these numbers is that the Fed may consider holding off on raising the federal funds rate later this year. More importantly, it may be more open in considering another round of so-called quantitative easing. That is the part that we should really be paying attention to.
If the CPI numbers keep coming in negative, we are going to have to assume at some point that the Fed will get more aggressive. If the Fed goes back to a loose monetary policy, that is going to change my outlook for things. I will be recommending more aggressive investing in hard assets, particularly precious metals and commodities.
For now, we will wait and see. Energy prices seem to be leveling off. We’ll see if the CPI turns back up for February. If not, this may change Fed policy going forward.