The latest Consumer Price Index (CPI) numbers were released for December 2017. The CPI was up 0.1% last month. The year-over-year now stands at 2.1%.
The median CPI, which is generally more stable, went up 0.3%. Year-over-year, the median CPI is up to 2.4%.
Since the median CPI tends to be more steady, it is somewhat significant that this number has been trending up. It indicates that this boom we have may have more legs.
To be sure, the boom we have right now is mainly in assets. It is holders of stocks and real estate who are benefitting the most. The stated unemployment rate is relatively low, but that does not reflect the struggles of the middle class with stagnant wages and rising healthcare costs.
There is a misconception that price deflation is bad because it is associated with depression. Therefore, it is held that some inflation is good, as long as it isn’t too high.
But the only reason that price deflation is bad is because it is in context with our world of central banking and the bubbles and busts that ensue. If there were no central bank, or if the money supply stayed relatively stable over time, then price deflation would be beneficial and not associated with economic downturns.
While the Fed is not currently inflating the money supply, it did so heavily from 2008 to 2014. And just the existence of the Fed places an implicit guarantee on the bond market and helps to keep interest rates lower than they otherwise would be.
When we see an uptick in price inflation in our current world, it can signal a boom period, at least up to a certain point. The problem is that much of this boom is artificial and unsustainable. If prices are rising because people are spending more money based on increased debt, then what seems like a boom is really just an unsustainable situation that will end with some pain.
If a family has $50,000 saved and decides to go on a lavish two-week vacation to spend all of the money, then that two-week period is going to seem like a boom time as long as they don’t think of the consequences of what is to come after the vacation is over. When the family comes back from vacation with no savings, reality is going to hit a lot harder as compared to if they had only taken a $5,000 vacation.
The point here is that an uptick in price inflation is not the sign of a prosperous economy. It is the sign of malinvestment. And the longer the unsustainable boom goes on, the harder things are going to fall.
The stock market can keep hitting all-time highs. It may do so for a while longer. But when the crash finally comes, it is going to be devastating, especially to those who are heavily invested in the boom times continuing.