The latest Consumer Price Index (CPI) numbers are out for July.  While the CPI came in flat, the median CPI was up by 0.2%.

Over the last 12 months, the CPI rose 0.8%.  The median CPI was up by 2.6%.

I always have to give the qualifying statement that the CPI numbers are not necessarily an accurate measure for price inflation.  If anything, they are probably understated.  Still, these are the numbers that many economists use, including Federal Reserve officials, and they are also useful in determining trends.

I like to follow the median CPI because it is less volatile.  Year-over-year, it was coming in at 2.5% for the last three months.  Before that, it was 2.4%.  With it now hitting 2.6%, this shows an upward trend, although it is nothing to get too excited about.

I believe there continue to be strong forces on both sides of the price inflation tug-of-war.  It is amazing that the CPI has remained as stable as it has.

There was a lot of monetary inflation from the Fed from 2008 to 2014.  While much of this new money is bottled up in excess reserves held by banks, it is still inflationary nonetheless.  We just don’t get the dramatic effect of fractional reserve lending.

The Fed stopped its QE3 program in October 2014.  It is approaching 2 years now.  This will mean that the dislocations from the previous monetary inflation will get revealed as malinvestment.  This will have a recessionary effect.

However, there is a time lag for everything.  While the market will attempt to price in certain events, even upon announcements or expectations, the actual flow of money through the economy takes some time.  Prices don’t instantly rise when the Fed monetizes debt.  Prices don’t instantly fall when the Fed stabilizes the monetary base, or even sells off assets.

The expectations for significant price inflation remain low, at least according to bond investors.  With interest rates so low, even on long-term bonds, it is an indication that investors are not demanding any significant extra compensation for dollar depreciation.

I continue to recommend being mostly conservative in this environment.  There is strong potential for a major downturn, but it is hard to predict the timing.

As long as the price inflation numbers are coming in relatively low, the Fed will not likely hesitate in printing more money (digitally speaking) when a downturn hits.  It will be QE4, or whatever it is called.  The government deficits will also get worse, and Congress will rely on the Fed to monetize some of the debt.

Even though Congress is still running huge deficits (in a supposed recovery), the Treasuries are being bought up by foreigners or private investors.  Rates are remaining low, or even going down, despite the Fed not currently buying assets (except for rolling over maturing debt).

As long as the CPI numbers stay low, the Fed will not feel inhibited in being aggressive with its monetary policy should the need arise.  Of course, this is the wrong policy, as it just prolongs the problems and misallocates more resources.

Since we can’t depend on the Fed or the federal government to do the right things, we have to prepare based on reality.  And the reality is that we should expect more monetary inflation in the future.  This will ultimately benefit those invested in commodities, but it will hurt virtually everyone in terms of living standards.