The latest consumer price index (CPI) numbers were released for July 2022.  The CPI was flat for the month, while the year-over-year price inflation has gone down to 8.5%.  It was expected to come in at 8.7%.

The less volatile median CPI came in at 0.5% for July, while the year-over-year median CPI increased to 6.3% (previously 6%).

The 8.5% CPI is certainly an improvement from the 9.1% year-over-year number that was reported the previous month.  But now for the bad news.

First, overall consumer prices aren’t going down.  The rate of price inflation may be decelerating, but it’s not as if you are going to see prices again that resemble what you saw a year or two ago, especially when you look at food.  Perhaps some asset prices like real estate and stocks will see price deflation, but your grocery bill probably isn’t going to go down any time soon.

In fact, your grocery prices continue to go up.  That is the second piece of bad news with this report.  The primary reason the rate came in flat for July is because gas prices fell quite a bit.  This is good news if you drive a lot.  But notice that the decline in gas prices didn’t lead to a decline in the CPI.  It only offset the rising prices of things, especially food. Actually, the price inflation for food is going higher even more than it was previously.

Now we move on to the third piece of bad news, and this is the big one.  While we may have hit peak price inflation for now, this likely signals that we are in for a big recession.

The Federal Reserve was expected to hike its target rate by 75 basis points (0.75%) at its meeting in later September.  Now, with the slightly lower-than-expected CPI numbers, the odds have shifted.  A 50 basis point hike seems more likely now.

This is why the stock market roared higher on Wednesday.

But the Fed is still in the mode of hiking rates and very slowly reducing its balance sheet.  This is in the face of a bond market where we are already seeing a somewhat inverted yield curve.  The spread between the 2-year yield and 10-year yield has been quite significant, with the 2-year yield coming in higher at 40 basis points or more.

I expect we will see an inversion of the 10-year yield and 3-month yield soon.  You can also compare the 30-year to the 1-year and see that investors are willing to take a lower yield for a 30-year bond than for a 1-year Treasury.  This seems absurd unless you consider that a severe recession is on the horizon.

Gold and other precious metals have not done particularly well in the face of high inflation.  It seems to be the only asset class that isn’t in a bubble.  Contributing to this is the strong U.S. dollar.  The dollar is only strong in comparison to the other more horrible fiat currencies.

The bond market and the gold market are indicating that we should fear a recession more than future price inflation.  They are telling us that there is going to be a massive correction.

I am not talking about the possible recession from two straight quarters of negative GDP.  I know there is a debate about the definition of a recession and whether we have been in one in 2022.

If we are in a recession now (or just got out of one), it will be nothing compared to what is coming.  These are very hard times for middle class America because real wage rates are going down with the high price inflation.

However, unemployment is very low.  And despite a tough year so far for stocks, the market indexes are still way above where they were a couple of years ago.

If we are in a recession now, it is mild compared to what will be.  I am talking about a recession coming where unemployment jumps higher, major companies are filing for bankruptcy, and stocks are going down 50% or more.  Also, I am less certain on this, but it wouldn’t surprise me to see housing prices fall by 25% or more.

There will be another CPI report before the next Fed meeting.  In the meantime, I am watching the yield curve to see if we get a bigger inversion.  As of right now, I think a hard recession in 2023 is likely.