Price Inflation Rises in January 2017

The latest CPI numbers came out for January, up 0.6% from the previous month.  The year-over-year CPI is now showing 2.5%.

The more stable median CPI is, well, stable.  It did show a 0.3% rise from the previous month, but the year-over-year still stands at 2.5%.

According to this Bloomberg article, food prices only rose 0.1%.  In a true free market, many consumer prices would actually be going down.

It is hard to know if food prices are actually nearly flat.  There are hedonic adjustments that make it hard to judge.  Of course, there is no true way to measure consumer prices, since products are constantly changing and tastes are constantly changing.

Still, this little creep up in price inflation could be significant from the standpoint of the Fed.  Perhaps it makes it more likely that we will see a hike in its target rate in March.

I am actually optimistic that consumer prices may be picking up, but not for the same reasons as many others.  We are probably in some sort of mini-boom period right now, with stock markets hitting all-time nominal highs.

Higher prices could help gold prices, but that is not the main reason I am a little happy to see consumer prices picking up.  The main reason is that I want the damage to stop.

If we were in a boom period because of actual prosperity due to savings and capital investment, then that would be great.  But the problem is that much of the mini-boom we are in is because of previous Fed monetary inflation.  It is not all built on real wealth.

The boom needs to come to end in order to stop doing damage.  The artificial boom phase is actually a misallocation of resources taking place.  If the Fed is facing higher price inflation, it is less likely to prop up the artificial boom in the future.

The Fed has had something of a free lunch.  Sure, there is much more criticism now than in decades past, but the Fed is not exactly on the hot seat right now as long as the economy continues to hum along, even if slowly for the middle class.

The Fed was able to expand its monetary base by almost five times from 2008 to 2014, yet there was little consumer price inflation to show for it.  The Fed got away with this.  The problem is that it did major damage by allowing massive deficit spending and by misallocating resources.

If this insanity is going to end – meaning the Fed won’t come up with a new QE program every time there is a bump in the economy – it is going to be from higher price inflation.  The Fed will be forced to protect the dollar instead of reigniting another monetary boom.

Of course, this could all be out the window quickly if another market crash happens.  If we hit a deep recession, price inflation could fall back down quickly.

There is also a possibility of a weak economy with rising consumer prices as something similar to what was seen in the 1970s.  The late 1970s and early 1980s was the last time that the Fed allowed a good cleansing of the malinvestment in the system.  The Fed allowed interest rates to rise and did not engage in monetary inflation during this period.  We got a couple of recessions, and we also got a new base for some actual real prosperity.

We’ll continue to keep an eye on the consumer price inflation numbers, only to give us a hint of what the Fed is more likely to do in the future.  Right now, I think we should expect the Fed to keeps its monetary policy relatively tight, and we should not be surprised by another hike in its target rate coming out of the March meeting.

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