The latest CPI numbers are out.  The CPI for December was -0.1% from the prior month.  That is a negative sign, perhaps literally and figuratively.

However, the year over year CPI came in at 0.7%.  This may be a somewhat misleading number due to the drop in energy prices in late 2014.

I like to look at the median CPI.  Year over year, the median CPI was up 2.4%.  It had been coming in at 2.5% for September, October, and November of 2015.

Generally speaking, the numbers are coming in low.  Of course, if we had a stable money supply, we would likely have slightly deflationary prices due to increases in technology and productivity.  We should wish for price deflation as a result of an increase in living standards and not central bank booms and busts.

I don’t really trust the CPI, as there is really no accurate measure for price inflation.  Each individual is impacted differently because we spend different amounts of money on different things.  Someone who doesn’t drive a lot may be less impacted by changes in energy prices.

I think the CPI is understated overall, if anything.  Health insurance, which everyone is now forced to buy (or pay a fine), is probably underweighted a great deal.  It is also likely understated a great deal as the health plans cover less and less.

With that said, the CPI still gives us a good idea of the trend.  In addition, the central bankers look at this number.  Despite the Fed’s massive monetary inflation since 2008, price inflation has stayed relatively tame.  The Fed has been given something of a free lunch.

The problem is that the general public just doesn’t understand the extent of the damage that the Fed is doing because of somewhat tame price inflation.  But the Fed has allowed the government to run massive deficits at low interest rates.  It has served to misallocate resources on a grand scale, which is why the economy continues to struggle and will likely get worse.

All of the talk about the Fed, for at least the last year, is about raising interest rates.  But that is not really the big story.  The Fed raised its key rate by a quarter percent in December by increasing the rate it pays banks on their reserves.  The Fed has not had to reduce the monetary base by selling off assets from its balance sheet.

Not coincidentally, since the Fed “raised rates”, market rates have actually been falling.  The 10-year yield briefly fell below 2%.  Investors are seeking safety in government bonds due to the falling stock market.

At this point, with stocks tanking, it looks like there won’t be another Fed rate hike in a while.  But more importantly, I think the chances of another round of so-called quantitative easing – which is money creation by the Fed – are increasing.

With the stock market falling and the economy likely headed into recession, the Fed is not going to be held back because of price inflation.  There has been asset inflation, as we see with the deflating stock market, but the CPI shows price inflation as relatively low.  Therefore, Janet Yellen and the Fed will see little risk in starting QE4, or whatever it will be called.

The Fed could start QE4 without reducing the federal funds rate.  They are controlling the federal funds rate by the interest paid on reserves, so the two policies (money supply and interest rates) are somewhat independent right now.  This will likely stay the case as long as the banks keep their massive piles of excess reserves.

If and when the Fed starts QE4, it will be a time to shift investment strategies.  It will mean we should start investing for higher asset prices in commodities.

We should hope that the next round of QE will bring significantly higher prices.  It isn’t because I want to see higher prices.  I just don’t want the Fed to keep destroying the economy and getting away with it.  At least if prices are going up a lot, then the Fed is more likely to get blamed.  It might also be less likely to create money out of thin air with every future crisis.

We need something of a shakeout like the late 1970s and early 1980s under Paul Volcker.  We need for the Fed to keep the monetary base stable, even in the face of recession.  I think the only way we are going to get this is through higher price inflation.