The latest consumer price index (CPI) numbers came out for June 2023. The CPI was up 0.2% for the month, and the year-over-year now stands at 3%, which is slightly lower than was expected.

The less volatile median CPI was up 0.4% for the month with the year-over-year coming in at 6.4%.

It seems that the Fed’s fight against inflation (that it created) is working. If the Fed keeps going with its current policy of gradually reducing its balance sheet and at least not lowering interest rates, then I think it will succeed in its quest for 2% annual price inflation as measured by the government.

Of course, this means that the Fed can’t have any major bailouts for the big banks or the Treasury market or Congress.

The reduced rate of price inflation indicates a slowdown in the economy and a coming recession. It’s not that lower inflation should be associated with a recession, but it is with the way things are happening.

Not the 1970s

It started to look like we were headed for the 1970s again with double-digit price inflation and double-digit interest rates. The 1970s also destroyed Keynesian theory when there was recession with higher inflation.

This isn’t like the 1970s now – at least not yet – because Fed policy is different. The Fed kept creating new money out of thin air and lost a handle on controlling the dollar.

It wasn’t until Paul Volcker became Fed chair in 1979 and started drastically hiking interest rates and shutting off the money tap that the rate of price inflation began to decline. We eventually got the recession (or recessions) of 1981 and 1982.

We are more in the 1980 phase right now. We just never saw interest rates or price inflation reach the levels that were seen in the 1970s.

It’s not to say that the Fed won’t reverse course and lower interest rates and expand its balance sheet again. But as of right now, the Fed is in a tight money mode, and the yield curve is highly inverted.

This all points to a deep recession ahead, which will include a popping of the Everything Bubble.

The Next FOMC Move

The FOMC has a meeting in a couple of weeks. The lower inflation numbers suggest that the Fed will be less likely to go for another rate hike of 25 basis points, but it’s hard to say for sure.

Stocks, bonds, and gold were all up on the day with the news of the lower CPI numbers. It looks like investors were bullish because there is a better chance the Fed will stop raising its target rate.

I think investors are swept up in the last of the mania and are missing the big picture. The lower CPI numbers are good news for consumers, but they shouldn’t be good news for investors. There is a big recession coming if we are to believe the inverted yield curve.

Again, this isn’t the 1970s. We are better off with the lower inflation. But we will probably get a bigger recession because of the size of the bubble.

You can enjoy the prices going up at a slightly slower pace at the grocery store if that is a reason to celebrate. Unfortunately for many, asset prices are likely to fall hard.