The latest consumer price inflation (CPI) numbers came out. The CPI was up 0.4% in April 2023. The year-over-year now stands at 4.9%, which is the first time in well over a year that this number came in below 5%.

The more stable median CPI also came in at 0.4% in April. The year-over-year median CPI stands at 7%.

Perhaps this is good news that the rate of price inflation is coming down. While it could certainly be worse, it is important to acknowledge that the situation is bad for the average American.

The financial media can celebrate the “improvement” of an annual 4.9% reading, but prices are still going up 4.9% per year. It’s better than 9%, but things are still getting worse. They are just getting worse at a slower pace.

Prices are still 4.9% higher than they were last year, and that is on top of the higher prices that had already happened at that time.

When anyone says that inflation is improving, it doesn’t mean that prices are going down or that they stopped going up. They are just going up at a slower pace than before.

For anyone who shops at the grocery store, it is quite evident that prices continue to rise. The price of eggs or meat is not going back to 2020, or even 2022. At this point, I think most people would be happy if they just stopped going up.

No Relief for the Fed

While the American people continue to suffer, the Federal Reserve is still in the same predicament. The economy looks weak, and with the inverted yield curve, it could get a lot weaker. There is a banking crisis happening, despite any comments from Jerome Powell to the contrary.

It will be a lot more difficult for the Fed to step in and bail out banks and bail out the entire economy with easy money when price inflation is still running near 5%.

We should have no doubt that the Fed will not allow the banking system to fail, but I don’t think we should expect much in the way of bailouts beyond that. The Fed will protect the dollar over protecting the stock market.

The positive aspect of higher price inflation is that it does serve as some protection from the Fed going wild with another recession. The Fed is far less likely to engage in QE (or whatever term you want to use for creating money out of thin air) when price inflation is still elevated.

During the financial crisis of 2008/ 2009, the Fed went on a wild money creation spree, but we didn’t get significant price inflation. Even though the money creation and artificially low interest rates misallocated resources and made us poorer, the low price inflation let the Fed get away with it. The damage done was not as apparent.

In this scenario, the consequence of rising prices from the previous monetary inflation is in everybody’s face. The Fed doesn’t get a free lunch this time.

Expect a “Neutral” Fed Until It Can’t Be

There really is no such thing as a neutral Fed. Just its presence as a lender of last resort serves a function for the banks. It also supports the bond market. Bond investors are never really worried about an outright default from the U.S. government because the Fed can always create more money.

But in terms of any major changes coming from the Fed, I don’t think we will see any until there are more major banking problems.

With the rate of price inflation coming down, the Fed may or may not hike its target rate by 25 basis points one more time.

It will probably keep its pace, for now, of slowly draining its balance sheet (if you ignore the bailout of Silicon Valley Bank).

Overall, I don’t anticipate much action from the Fed until the economy starts blowing up. Even then, I think the Fed will only step in for the financial institutions.

The Fed isn’t going to bail out the stock market. The Fed will only bail out the bond market if there is a chance of default. It isn’t going to bail out housing unless it starts to significantly impact the banks.

I am still of the opinion that you should invest (or not invest) accordingly. There will be no bailouts for the stock market.