The Bureau of Labor Statistics (BLS) released the latest consumer price index (CPI) numbers for June 2017.
The CPI for June came in at zero. That is 0.0%. The year-over-year stands at just 1.6%.
The more stable median CPI came in at 0.1%. The year-over-year median CPI now stands at 2.2% after being at 2.5% for the first three months of 2017.
When I said that the year-over-year CPI stands at “just” 1.6%, that is not to mean that lower price inflation is bad. As consumers, we hope for less price inflation, unless you actually like to pay more for the things you buy. We should actually hope for an increase in purchasing power due to advancing technology and production capabilities.
The problem here is that this is mostly a monetary phenomenon. It would be great if monetary inflation stayed near zero and we gained purchasing power. The problem is that this disinflation is a result of a prior artificial boom, even if it hasn’t felt like that much of a boom. The other problem is that the Fed will likely react in harmful ways, as it typically does when things get bad.
The term disinflation is an appropriate one at this time. It means there is a decrease in the rate of price inflation. We are still losing purchasing power, but at a slower rate.
This is a warning sign of a softening economy. The American middle class has already been struggling. The good news reported is in primarily two things:
- A booming stock market
- Low unemployment (at least according to the government statistics)
Unfortunately, there are problems with both of these things. For stocks, it is a bubble waiting to implode. The boom in stocks has largely been a result of the low interest rates and the easy money since 2008.
In terms of unemployment, it is complicated. It does not include the people who have given up looking for jobs. And just because the official unemployment rate is low, it doesn’t mean great things are happening. Sure, it is better for people to be working who want to work. But at the same time, we should consider that wages have been mostly stagnant.
The disinflation we are seeing in the latest CPI numbers could mean that some air is starting to come out of the bubble. This is why I have continued to caution on stocks.
The Fed has kept the monetary base relatively stable for nearly 3 years now. But from 2008 to 2014, it was a time of very loose money. And even with the Fed’s tighter policy, interest rates have remained low, which has probably contributed to the boom in stocks.
We also have to wonder how the lower CPI numbers are going to impact the Fed’s decisions going forward. Is the Fed going to continue to raise its target federal funds rate in the face of disinflation? And how low do the price inflation numbers have to go before we start hearing talk of another round of quantitative easing (digital money printing)?
This could still take a little while to fully develop, but be warned here. There are many warning signs of a coming recession.