The latest CPI report came out today and showed that consumer prices overall rose just 0.1% last month in November. It was expected to be 0.3%.
The year-over-year price inflation still stands at 7.1%, which is obviously well above the Fed’s supposed target of 2%.
Stocks responded well on the news in the morning. Perhaps investors are expecting the Fed to be a little less hawkish on inflation going forward, although more rate increases are expected.
Even if the Fed stops increasing its target rate after the December meeting, I don’t think there is any stopping the coming recession. Unless the Fed responds at least as aggressively as it did in March 2020 when it began the more than doubling of its balance sheet, there is no stopping the economic pain coming in 2023.
And if the Fed did something crazy to stave off a recession, it would only make things worse in the long run.
The yields are highly inverted right now, which is the best warning sign of a coming recession as there is. Meanwhile, the Fed is still raising rates and slowly draining its balance sheet in the face of a highly inverted yield curve.
I don’t think people are processing just how bad things are going to get. We already have situations of shortages. Debt continues to go higher not just for government, but for families as well. With the high price inflation, real wages have been going down, but the tax bills aren’t going down with them.
Middle class America is already hurting, and that is with a relatively low unemployment rate. While a recession might ease consumer price inflation, there will also be a massive asset deflation. Stocks and real estate have already hit some turmoil, but it is likely to get much worse.
Once the recession becomes evident, people will start tightening their belts. This will cause business activity to slow down greatly, and we will see a massive shift of resources in the economy. This will cause greater unemployment, and it will cause many company bankruptcies to the extent that the government doesn’t bail them out.
Most businesses are not some kind of money laundering scheme like FTX, but it doesn’t mean they don’t get sucked in to the bubble economy and over invest. The companies that are overleveraged will have trouble paying their bills.
I expect stocks to get absolutely hammered in 2023. I also expect housing prices to generally go down, but they also may be more responsive if the Fed reverses course on its monetary policy and starts inflating again.
While the government sends tens of billions of dollars off to the money pit of Ukraine, middle class Americans suffer and will continue to suffer.
It is best to start living like it is a recession now. Then the adjustment won’t be as hard. Many Americans will be in for a shock when the good times stop rolling next year. I think many are already starting to face reality, but they just don’t fully believe it yet. They have seen their purchasing power decline, but they don’t believe that it will continue or that it will get significantly worse.
If you live like you are in a recession now, then you will be more mentally prepared when the recession actually hits.