The latest consumer price index (CPI) numbers were released for July 2023. The CPI was up 0.2% for July, and the year-over-year stands at 3.2%, which was slightly less than expected.
The median CPI came in at 6.1% year-over-year, but the median CPI in July was just 0.2%. The median CPI tends to be less volatile, but the rate of 0.2% for July is a big drop from where it had been in previous months.
https://www.clevelandfed.org/indicators-and-data/median-cpi
I was surprised to hear Rick Santelli and Steve Liesman on CNBC agree on something. More surprisingly, I agreed with their point. They said something to the effect that prices weren’t going down. The rate of increase was going down. But the prices of eggs and other things are still way higher than they were a few years ago.
With this latest CPI data, it does make it less likely that we will see another rate hike out of the Fed this year. It has surprised me that the Fed went as high as it did, especially in the face of a heavily inverted yield curve. Jerome Powell and company are more concerned about price inflation than a possible recession.
Of course, that may change quickly depending on the severity of the recession that is likely to hit at this point.
There’s Good News and Bad News
The good news is that the rate of price inflation is coming down. We probably won’t see any outright deflation with consumer prices, although you never know. The deflation will come in asset prices – particularly real estate and stocks.
This is relief that the American middle class really needs. It isn’t a good situation when prices at the grocery store are going up faster than your paycheck.
We actually need a recession/ correction to restore some sanity in our world. It isn’t sustainable to have consumer prices continually going up faster than wages. Something has to give at some point, unless we are destined for absolute poverty.
The bad news is that we need a recession to restore this sanity, and it is the recession that often feels the most painful. That is when unemployment tends to go up as resources are reallocated. It is a time when people see their wealth on paper vanish.
The recession is like someone stopping the party. It is easy to blame the person stopping the party, but the party was going to come to an end at some point anyway. The person stopping the party may have done some people a favor even if it didn’t seem so at the time. They wanted to keep partying and drinking, even though it wasn’t sustainable.
When the Party Stops
There is a high probability there will be a recession before the November 2024 elections. That is something that most political pundits are not taking into account.
You can already tell that the party is winding down now. More people are realizing that they can’t sustain their spending. They can’t keep running up more debt.
As soon as stocks crash and the recession hits (which are likely to somewhat coincide), people will change their behavior if they haven’t already.
Some investors will panic, and some will stay the course. But the common theme is that almost everyone will start living more frugally.
It is a lot less painful if you start making changes before the party stops. You can be the person at the party who starts drinking water while everyone else is still consuming alcohol.
If you start cutting back a little in preparation, it is less painful mentally when the recession hits. It makes for less of an adjustment.
I encourage people to pay off their debt anyway, even without a recession on the horizon. But it really is that much more important to get rid of debt before a recession hits. A low-interest mortgage, student loans, and a car loan may be ok, but even here it depends on the size. All credit card debt should be gone as soon as possible, but I would say this with or without a recession on the horizon.
Overall, I think those who are mentally prepared for a hard recession will handle it better. They won’t be surprised when it hits, and they are less likely to make bad choices when it is here.