The latest consumer price index (CPI) numbers were released, and it isn’t pretty.  The CPI went up 0.6% for the month of January 2022.  Year-over-year price inflation now stands at 7.5%.

Even the less volatile median CPI went up 0.6% for the month, and the year-over-year median CPI stands at 4.2%.

In other words, from January 2021 to January 2022, your dollars have depreciated in value by 7.5%.  If you were buying a house or a used car, you probably did a lot worse than 7.5%.

After almost a decade and a half of loose monetary policy from the Federal Reserve, the Fed is now forced to address the issue of inflation.  Of course, the Fed’s massive increase in its balance sheet is the inflation, but the prices are finally starting to reflect it.

It is now widely expected that there will be multiple Fed rate hikes in the coming months.  This means that the Fed will raise its target range for the federal funds rate, which largely impacts short-term interest rates.

Unless something drastic happens like a massive stock market crash, then we should expect short-term interest rates to rise this year.  They will finally move up and away from being near zero.

It is less clear where longer-term rates will go.  The 10-year yield has hit 2%, which is higher than where it’s been recently, but it is still very low compared to history.

If short rates go up and long rates stop going up, then we will see a flattening of the yield curve.  If the yield curve inverts later this year, this will be a strong signal to not only sell equities, but to short them.

Even with an inverted yield curve where short-term rates go higher than long-term rates, it can take time for everything to play out.  It’s hard to believe, but we could still be over a year away before the Everything Bubble finally starts to implode.  Until we get a clearer signal from the yield curve, I would be hesitant to bet against the market at this point.

Real Wages and Living Standards are Going Down

Think about what a 7.5% price inflation rate means for middle class America.  It means that living standards are going down.  Maybe taking on debt or just not saving as much covers some of this up temporarily, but it inevitably means a decline in lifestyle.

There is no way that real wages are going up or even staying the same.  While the labor market is good these days for those looking for work, companies can’t just pay massive increases to employees without suffering a loss in profitability.

Wages are not going to keep up with the rate of price inflation, especially at this level.  And even if they supposedly do, you have to think through how well people really are doing.

Let’s say that you have your annual review at work with Corporation ABC.  Your boss says that you have been doing a good job and that you have become very reliable since starting at Corporation ABC 5 years ago.  He tells you the great news.  You are getting a salary increase of 7.5%.

The problem is that you have more experience now and are a bigger benefit to your employer than you were last year, let alone 5 years ago.  But your wages are only keeping pace with inflation, so you haven’t really gotten a raise even though your value to the company has increased.

But are your wages even keeping pace with inflation?  If we accept the government statistics, then prices went up 7.5% over the past year.  You were already paying the higher prices before you got your “raise” of 7.5% from your employer. That doesn’t make up for paying the higher grocery bill last month.  It briefly catches you up to the Federal Reserve.

Now the process starts all over again.  You have to wait another year before another “raise” at work while prices relentlessly climb higher in the meantime.

It gets worse.  When you get that 7.5% increase, you have to pay payroll taxes and income taxes at your highest marginal tax rate.  That 7.5% may only be 5.5%.

Unfortunately, the government doesn’t tell you that you don’t have to pay any taxes on that additional 7.5% of your income because it is just making up for the Federal Reserve’s inflation of the money.  There may be an increase in the exemption amount on your tax return, but it will not cover the difference.  Plus, the horrible payroll taxes come out of every dollar you earn without adjustment.

So your 7.5% raise may end up being a 5.5% raise to cover the 7.5% that prices went up last year.  Does this sound like a good deal for middle class America?  How is that working out for everyone?

But the government can spend (waste) trillions of dollars on everything under the sun while imposing rules that make our lives more difficult and costly.

There is only one solution to all of this.  The Federal Reserve must stop creating money out of thin air and supporting the massive government debt.  If the government massively cuts its spending while the Fed stops its money creation, then the inflation will stop.  It’s that simple.

Meanwhile, middle class America takes it on the chin.  Real wages are going down.  It will feel more real when the Everything Bubble finally collapses.