I am going to continue to watch the CPI numbers closely.  I know they are government numbers and there are issues with the calculations, but they do serve a purpose.

First, the numbers can at least give us a trend for consumer prices.  This obviously doesn’t factor in many asset prices, but it is still useful.

A second reason to pay attention to the CPI numbers is for the simple fact that the financial media, and the Fed itself, pay attention to these numbers.  If the Fed is going to make a decision based on higher or lower than expected CPI numbers, then it will affect all of us.

The latest numbers are out for February 2015.  There is typically close to a month delay.  The percent change over the last 12 months is zero.  We are officially flat.  If you use the CPI excluding food and energy, then it shows a 1.7 percent increase year over year.  So a big part of the deceleration in consumer price inflation is due to the drop in oil.

The median CPI is 2.2% year over year.  It has shown this same number for the last 5 months.  The median CPI tends to be a good measure.  As you can see, it is far less volatile.

While consumers always benefit from price deflation, assuming it isn’t a crash from a previous artificial boom, the numbers are still relatively tame right now, even with slight increases.  The Fed supposedly targets a 2% rate, which is ridiculous by itself, but the CPI is below that target right now, unless you use the median CPI.

For this reason and others, I really don’t expect the Fed to reduce its balance sheet by any significant amount in the future.  There is little reason in the eyes of the Fed to have monetary deflation when price inflation is mild.

This doesn’t mean the Fed won’t raise the federal funds rate by increasing the rate it pays to banks on reserves.  But even here, I think the relatively low CPI numbers will make the Fed hesitate more and increase rates more gradually.  This may be temporarily bullish for stocks, but we can’t be certain.

Assuming oil prices have leveled off, I expect the CPI numbers to turn positive again.  If they don’t, this will be further reason to expect the Fed to act slowly, if at all, in raising its benchmark rate.

With low price inflation numbers and a strong dollar, along with massive monetary inflation by the ECB and BOJ, I won’t be surprised if we are talking about QE4 this time next year.