The latest Consumer Price Index (CPI) numbers were released this week. The CPI rose 0.5% in January 2023 from the previous month, which was a little higher than expected. The year-over-year CPI now stands at 6.4%.

The more stable median CPI rose 0.7% in January from the previous month, while the year-over-year median CPI stands at 7.1%. This is the highest year-over-year rate in the median CPI that we’ve seen in this era of higher price inflation.

To use the jargon of the financial media and so-called experts, it seems that inflation “remains elevated”, but that it is “cooling” a bit.

The most important point here is that prices continue to go higher. Even if the CPI numbers are slowly coming down from previous months, prices are still rising. They are just rising at a slightly slower pace.

We aren’t ever going back to the prices that existed a few years ago for most goods and services. Houses and stocks, which are the face of the asset bubble, are perhaps the exception.

But the price of eggs isn’t going back to where it was two years ago. It probably isn’t going back to six months ago either.

Even the 0.5% that came in for January is significant. That means that something that cost $100 in December cost 50 cents more in January. Maybe that doesn’t seem like much, but it is a lot when it compounds each month.

Standard of Living

Prices going up at 6% per year is quite significant. If you get a 6% raise at your job (most people aren’t), you will pay more in income and payroll taxes, so you still aren’t even breaking even.

In our world today, the general trend is that you are supposed to be getting better off as time goes on. It may happen slowly, but it compounds over time. Each generation should have a higher standard of living than the last.

We are much better off today in terms of technology. We have smartphones that didn’t exist a generation ago.

Unfortunately, the cost of living for basic necessities hasn’t gotten much better. It may actually be worse, especially when you consider the costs for housing and medical care.

I think it is a secret within middle class America right now that the struggles are real. We can read statistics about jobs, wages, disposable income, and everything else. The bottom line is that it is difficult for many middle-income people to pay their bills. Even for those making a higher-than-average income, times are tighter than they have been in the recent past.

It is tough for people to save money and still be able to afford some luxuries like traveling or eating out.

This isn’t to say that you can’t make it these days on a middle-class income. It’s just that it isn’t so easy. Times are a lot tougher than they need to be. But we have to fund vaccine ads and weapons of war for Ukraine.

When Will Relief Come?

The Federal Reserve has adopted a tight monetary stance over the last year. The balance sheet is slowly declining, and interest rates have gone up from where they were.

The yield curve is still highly inverted, which means a recession is coming if history is any guide.

If we hit a deep recession and the Fed doesn’t respond with creating new money out of thin air, then price inflation really will cool. We may actually see prices stop going up for a while.

Of course, the Fed probably will respond at some point, especially if there are problems with the big banks or the bond market. But the Fed likely won’t go crazy again with its monetary inflation unless price inflation really has cooled down to somewhere around its supposed 2% target.

Middle class America actually needs a recession. It won’t be fun, but it is the only solution for the longer run. The average American is getting hammered with higher prices. Wages aren’t keeping up with the rising prices, which can only mean a decline in living standards.

We need a correction from the malinvestment. We need a reallocation of resources towards things that are actually in market demand.

The problem with the correction/ resource reallocation is that it is disruptive. It can lead to unemployment. It is a hard time, but it is a consequence of previous bad policy of monetary inflation and government spending.

If the Fed is forced to keep a relatively tight policy, it might actually force Congress to reduce spending, or at least stop increasing it so much. It doesn’t seem like there is anything stopping the federal government from spending like crazy. But even here, there are limits.

The Fed had it easy for the first 20 years or so of this century. The Fed created new money like crazy from 2008 to 2014, but there were no direct consequences in the form of high consumer price inflation (comparatively speaking). Now the Fed has to deal with higher price inflation and interest rates that are now way above zero.

The American people need a period of tight money and reduced government spending and intervention. Only then will we see a return to real prosperity that is sustainable.