I occasionally like to examine the Consumer Price Index (CPI) numbers.  Although they are government statistics, they are useful to us nonetheless.

First, the statistics show us trends.  Maybe the numbers understate actual price inflation, but this is really impossible to measure anyway because the quality of products are constantly changing, as well as what is demanded in the marketplace.  But regardless, we can see if price inflation is picking up, slowing down, or staying steady, at least according to the CPI numbers.

Second, analysts look at these numbers, including Federal Reserve members.  This can affect the Fed’s decisions in terms of monetary policy.  So it doesn’t matter if the Fed is wrong in using these numbers.  We have to take the CPI numbers into account because they give us a better idea of what the Fed may do.

The latest numbers are out for August.  The CPI is down 0.1% in August from the previous month.  But this doesn’t tell us the whole story.

Over the last 12 months, the CPI is up just 0.2%, which is well below the Fed’s supposed target of 2%.  However, the CPI less food and energy is up 1.8% from a year ago, indicating that oil is largely responsible for the flat number.

Just as with many other statistics, we often get a better picture using the median instead of the average.  The median CPI is up 2.3% from a year ago.

Of course, the CPI numbers can be quite misleading because they largely don’t take asset inflation into account.  The big run up in stock prices since 2009 is not reflected.

This is similar to what happened in the lead up to the stock market crash that marked the beginning of the Great Depression.  There was an easy money policy in the mid to late 1920s, but consumer prices were not rising much.  Meanwhile, there was a bubble in stock prices.

This isn’t to say we are going to get another Great Depression.  The initial stock crash was just one event in the Great Depression.  If the government had let the markets clear and done nothing about it, then there probably would have been a quick recovery.  There certainly would not have been a 12-year depression, or longer if you count the hard times during World War 2.

If you are looking to invest or speculate in gold or gold stocks, then you could really take these numbers in two ways.  The relatively low CPI numbers indicate there is little fear of inflation, which is bearish for gold.

On the other hand, the low CPI numbers make it more likely that the Fed will have a looser monetary policy in the future if it does not deem price inflation as a threat.  This is bullish for gold.

My overall sense is that we should be really cautious right now.  There is a good chance for an economic downturn.  This could be bad for gold investors in the short run.  However, if the Fed turns back to its quantitative easing (money creation), then I believe gold will shine shortly after that.

We’ll keep watching the CPI numbers as part of watching what the Fed is doing.