The latest consumer price index (CPI) numbers came in for April 2017. Consumer prices, while still increasing, are slightly down when measuring over the last 12 months.
The CPI for April came in at 0.2% after being negative in March. The year-over-year CPI fell slightly to 2.2%.
The more stable (and probably reliable) median CPI came in at 0.1% for April. The year-over-year median CPI, after being at 2.5% for the last 5 months, came in slightly lower at 2.4%.
The consumer price index does not seem to do a good job of factoring costs that eat up a good portion of a typical family budget. For example, health insurance is a huge burden on the average American family. While it is not strictly monetary policy that has driven health insurance premiums and medical care costs higher, it is also not monetary policy that has driven down the price of electronics. Technology gets cheaper in spite of monetary policy.
In some sense, Americans (and the rest of the planet) have never had it so good. We have smartphones, virtually endless food, and many luxuries that simply didn’t exist just a few decades ago. Yet, at the same time, the American middle class is struggling to pay the bills for basic expenses, albeit upgraded basics.
In a true free market economy, our living standards would continually go up. We would find our basic expenses decreasing, coupled with more choices, more leisure time, and greater luxuries.
While I don’t think the CPI is a good measure of the state of the average American family, it is useful. It may not even be that accurate in terms of measuring actual price inflation. However, it does show us trends, and it can also signal upcoming economic events.
Some think the economy is doing well because price inflation is relatively low while stocks are booming. Of course, this was also the situation in the late 1920s, and we know how that turned out. The slightly decelerating CPI may be a sign that our current mini-boom is about to slow down. Stocks may be the last thing to go.
It is almost impossible to predict when a recession will hit. We just have to know that the likelihood is relatively high at this point, and your career and your investment portfolio should reflect this risk. This is why I recommend a permanent portfolio.
While many libertarians have warned of rising interest rates for a long time, I have been very cautious on this front. While I think the federal government is a total mess, I recognize that most investors still regard U.S. government debt as an investment safe haven. Unless there is a significant fear of high price inflation (which there isn’t right now), then investors will buy U.S. Treasuries and bonds, if and when a recession hits.
Therefore, I expect that interest rates will go lower before they go significantly higher. The time to get out of U.S. government bonds (or short them) will be after the recession hits and interest rates (particularly long-term interest rates) are driven lower.
I still like gold for the long term. It is harder to predict for the short term. A recession may bring the dollar price of gold down for a short period of time, but I would expect it to recover quickly with announcements of easier money by the Fed.
In conclusion, the CPI hasn’t changed much, but it is slightly lower year-over-year. If it decelerates more, we should really throw up the caution flag.
While stable or declining consumer prices are generally a benefit to consumers, in our world of central banking today it can also be a signal of a deflating bubble. If we see a bubble that pops, I think stocks will be hit the hardest.