The CPI report came out for December 2022.  Price inflation came in right where it was expected to be.

The CPI came in at negative 0.1% for December, while the year-over-year now stands at 6.5%.

The median CPI, which is less volatile, came in at 0.4% for the month, and it is up 6.9% year-over year.

Most asset classes finished the day higher, probably due to expectations that the Fed can be a little less hawkish on inflation.  Gold was higher.  Bitcoin was higher.  Bonds were higher with longer-term interest rates going down.  Stocks finished higher.

I think the little rally, particularly in stocks, is going to be short-lived.  The Fed could stop raising interest rates and stop draining its balance sheet right now, and I don’t think it would change the fact that there is a recession coming.

Unless the Fed goes ballistic and starts doubling its balance sheet again, as it did in 2020, then I don’t think the coming recession will be stopped.

The Treasury yields are still highly inverted at this point.  The 30-year yield is more than 100 basis points below the 3-month yield.  This is bordering on absurdity.  I can’t ever remember seeing the yield curve this inverted.  It wasn’t this inverted in 2006 or 2007 before the financial crisis hit.

The bond market is screaming recession, while the Fed will like continue to raise its target federal funds rate, even if more slowly.

And let’s not pretend the era of inflation is over.  We are still at 6.5% year-over-year, which is way above the Fed’s supposed target of 2%.

I have not taken the position that some libertarians and Austrian school economists have taken that price inflation will continue to roar, and possibly even go higher.  I am more in the camp that price inflation will fall in the short run, at least until the Fed goes on another massive money creation spree.

I believe there is going to be a deep recession in the near future.  It will likely start before the end of 2023.  This is going to reduce consumer demand for many things that aren’t necessities.  The prices for food at the grocery store may not come down, but a lot of other things likely will fall in price.

Fear will quickly take over in the economy.  People will become more conservative with their money.  For those who maintain their income, they will likely save more money where possible.

The U.S. stock market was hammered in 2022.  The Nasdaq was hit especially hard.  It was down about 33% last year.  This does not at all mean we are anywhere near a bottom.  I will discuss this in a future post, but I think there is a lot more room to fall.

So while consumer price inflation seems to be cooling a little bit, the economy is still in major trouble with the past misallocations.  The bond market says a recession is coming soon.  This is the best warning you’ll get.