The latest Consumer Price Index (CPI) numbers came out. The CPI was up 0.1% in May 2023. It now stands at 4% year-over-year.
The less volatile median CPI came in at 0.4% in May, with the year-over-year now at 6.7%.
So the rate of increase seems to be going down, which is a small piece of good news for middle class America.
Still, the improving number is still at 4%, which is double the Fed’s target. If you spend like the CPI is measured, then your dollars still depreciated by 4% over the last year, and that is after sustaining far worse before that.
The price of gold initially went up, but then ended the day lower. Stocks went higher on the news, as investors see this as good news for stocks because the Fed is less likely to hike its target rate at the next meeting, which just happens to be tomorrow – June 14.
I have generally been in the camp of expecting price inflation to decline because of the Fed’s very tight money policy.
Stock Investors are Looking at the News All Wrong
Maybe some stock investors are getting it right. There are many day traders who hop in and out of the market. Some of them are making money.
But for the investors who are buying and holding U.S. stocks, it has disaster written all over it.
The lower CPI is good news, but it is also serving as a warning signal that a recession is on the horizon. Actually, the extremely inverted yield curve is the main warning signal, but the lower CPI is just confirmation.
To be sure, there isn’t a tradeoff between economic growth and inflation. The 1970s blew that myth out of the water. You can certainly have high inflation (price or monetary) and still have recession.
But in this case of 2023, the Fed has had a tight money policy for over a year. They have been raising interest rates in the face of an inverted yield curve.
If the Fed doesn’t reverse course because it has to bail out the banking system, and it keeps a relatively tight money policy, then we should expect consumer price inflation to go down, and we should expect a recession sooner rather than later.
I am investing accordingly. The major fall in stocks is going to happen. How much of a bigger warning sign do investors need at this point?