The latest CPI numbers are in for March 2015. They show an increase of 0.2%, whether or not you include food and energy.
The price of oil has stabilized for now, or even gone up a bit, so this plays something of a role here.
The year-over-year CPI now stands at -0.1%. But if you take out food and energy, it is at 1.8%.
The median CPI gives a better picture of overall price inflation. It has stood at 2.2% for the last 6 months. You can see that this number is far less volatile. It takes out the big swings of items such as oil (or those things directly correlated to oil).
Overall, the CPI numbers are still relatively tame when you consider that the Fed has basically quintupled the adjusted monetary base since late 2008. But much of this money went into bank reserves and the demand for money remains high.
I believe that with the Fed’s current tight monetary policy (its latest round of QE ended about 5 months ago), there is a considerably high risk of recession. And even though the Fed is threatening to raise the federal funds rate, the market rate of interest for longer-term bonds has stayed low or even gone down. The 10-year yield is under 2% as of this writing.
As long as the CPI numbers do not jump up dramatically, then a recession looks to be a more immediate threat than anything else. We won’t see higher interest rates until we see higher price inflation numbers come in.
I still think the big story right now is China. It is a country of 1.3 billion people with a massive real estate bubble and now a massive stock market bubble. If the Chinese central planners have been able to prop up these bubbles for this long, then who knows how long the U.S. stock bubble will last?
China is in far bigger trouble than the U.S., yet they have managed to keep the game going. I don’t think it is going to last much longer, but it really is amazing how many years it has gone on.
Perhaps a Chinese bust will lead the world into something of a global depression. I know the U.S. has been somewhat immune to the weak economies of the rest of the world in the past, but the U.S. has its own major dislocations that will shake out.
This may sound pessimistic, but it is just the reality at this point. You really need to prepare and put yourself in a good position for when things do get rough. I think the biggest threat is the Fed’s next reaction and how much it returns to more monetary inflation. But that will come after the initial downturn.
Technology and productivity in many sectors will continue to grow, despite a bad economy. But we should be prepared for some rough economic times ahead.
The CPI numbers are indicating that a recession is a more immediate threat than price inflation. If this outlook changes, then I will be sure to provide updated information.