The Consumer Price Index (CPI) numbers were released for June, and they came in even hotter than expected.

The CPI rose 0.9% from the previous month.  The CPI less food and energy was no better.  It also rose 0.9% from the previous month.

The year-over-year CPI now stands at 5.4%.

The more stable median CPI came in at just 0.2% for the month of June.  This indicates that the significant rise in consumer prices is occurring in half or less of the products being measured.  Still, it is significant for any family that has a budget with a good portion of it allocated towards those products that are increasing at a higher rate.

It is important to realize that these price inflation numbers are like compounding interest.  If you have 1% inflation every month, you don’t get 12% after one year.  It is compounding.  1% per month for 12 months gets you a little over 12% after one year.  This makes a difference over a long time span.

Is it Transitory?

If you listen to the financial media, you will keep hearing the term “transitory”.  The Fed is using this term to indicate that this inflation is just temporary.

There is a problem with that.  Let’s say that the Fed is right and this really is just transitory or temporary.  Let’s go through a thought exercise.

Let’s say you go to the grocery store once per week.  Your average weekly bill is $100.  Then you get some higher price inflation for one year that is considered transitory.  After that first year, you are paying $110 per week at the grocery store.

Then the price inflation stops.  Everyone is relieved that inflation was just transitory.  It has fallen to zero now.  But when you go to the grocery store, you are still paying $110 per week.  You aren’t going back to the old days of paying $100 per week.

You can apply this across the board to everything.  You can apply to your rent.  You can apply it to your medical costs.  You can apply it to your transportation costs, and your clothing, and your restaurant dining, and your monthly trip to the hair salon.

If your wages didn’t also go up by 10%, then you have permanently lost, at least until your wages catch back up.  Even here, with taxation, your wages would have to go up by a little bit more than 10% for that year.

Of course, we aren’t going to zero percent inflation.  The Fed’s idea of transitory price inflation is that it will return back to its 2% target.  So you will keep getting continued price inflation, but it will be at a slower pace.

And the Fed now says it wants an average of 2% over time.  We have no idea what this means and how far back it is supposed to go.  Is it supposed to average 2% going back 20 years?  If we use government statistics, then we could have many years of inflation running at 5% or more to supposedly make up for the lack of inflation in the past.

Tapering?

This is all a joke.  Middle class America is taking it on the chin.  Of course, much of middle class America cheers on the stimulus checks, the unemployment benefits, and all of the other “free” things coming from the government.  People say they care about the deficit/ debt, but they really don’t care.

Even though the Fed claims not to use the CPI as its main measuring stick, there is no question at this point that price inflation is running hot.  It is even probably outside of the Fed’s comfort zone.

We will have to wait until the next FOMC meeting to see if there is any change in policy.  I don’t think they will raise the target federal funds rate at the next meeting.  It is possible we could see some light tapering, although even that is more likely to come in September if it comes at all this year.

This means that instead of the Fed creating $120 billion per month in new money every month, they might only create, say, $90 billion per month.  It is still highly inflationary, but just a little less so.

We will also get to see investors react to all of this.  The giant speculative “everything bubble” that we are currently in is all dependent on loose money and low interest rates coming from the Fed.  When the fuel for the fire starts to be taken away, it is going to have major impacts.

The Fed is too scared at this point to remove all of the so-called stimulus.  Even if price inflation continues even higher, I don’t they will go cold turkey.  They aren’t going to just all of a sudden stop all asset purchases.  It would instantly tank the stock market.

All of this monetary inflation is finally catching up with the Fed.  They are going to have to walk on a narrower tight rope now.  They don’t want to lean too far to the inflation side, and they don’t want to lean too far to the tight monetary policy side, which will give us a recession.  They can maintain their balance for now, but eventually they’ll run out of rope.