October CPI Ticks Higher

The Consumer Price Index (CPI) rose 0.4% in October from the previous month.  The more stable median CPI stayed steady, rising at 2.5% annually.

With the slight uptick in the CPI and the election of Donald Trump, I think it makes more likely that we will see the Fed hike its target rate on December 14.  It also helps that the stock markets are hitting all-time highs.

I don’t find the CPI numbers all that reliable.  One of the main reasons that Trump was elected was because he came across as an advocate for the struggling middle class.  And the middle class has been hammered with much higher health insurance premiums, partially due to Obamacare.

If you ask most middle class families, they will probably disagree that consumer prices have risen just 1.6% over the last year.  That is the number given by the Bureau of Labor Statistics.

Any raise in wages that people see are getting quickly eaten up by higher health insurance premiums.  And that doesn’t factor in the subtle increases at the grocery store and in other facets of our lives.  Unfortunately, most things are not like the electronics industry, where prices gradually go down with higher quality, despite the monetary inflation from the Fed.

The slight uptick in the CPI is just one month, so we will see if the trend continues.  It is a significant statistic to watch though, despite its unreliability.  That is because Fed officials watch this statistic.

If consumer prices begin going up at a faster rate, it makes it more likely that the Fed will hike the federal funds rate and pay a higher rate on bank reserves.  The Fed has already kept a relatively stable monetary base since October 2014.

I am not sure how much longer the Fed can keep this policy while also keeping the economy out of recession.  I am afraid that Donald Trump is being set up to take a hard hit.  He should hope that a recession comes sooner rather than later.

Politically, it will be worse for him if it takes at least another year before there is an economic downturn.  If it happens in late 2017 or beyond, he will take a lot of the blame.  If it happens in the first half of 2017, the media will try to blame him, but most Americans will know better.

The president does not have that much of an impact on the economy, unless he plans to significantly reduce regulations and government spending.  Otherwise, it is mostly monetary policy that dictates things.

There are a lot of moving parts.  The CPI is a key statistic because if it goes much higher, the Fed will be forced to hold back on any further stimulus and likely raise its target rate further.  This will likely result in a recession.

Even if the CPI doesn’t go any higher, we could still see a recession.

The Fed is maintaining the correct policy right now in that it is not engaging in monetary inflation.  But it did quintuple the monetary base from 2008 to 2014.  We may still have significant consequences to deal with from this prior policy.

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