The August 2023 CPI report came out showing that the CPI was up 0.6% in the last month.  The year-over-year CPI rose at 3.7%.

The less volatile median CPI came in at 0.3% for the month.  The year-over-year median fell from previous months and is now at “just” 5.7%.

Much of the increase in consumer prices last month is attributed to the price of gasoline.  So if you don’t drive much, then maybe you are doing better than others.

If you go to the grocery store, you are probably still noticing that some prices are going higher.  They are just not going up as fast as they were last year.  But the more modest increases now are on top of the already high prices from last year.

Another Rate Hike?

The FOMC has its next meeting on September 20, 2023.  Jerome Powell has said that another rate hike might be necessary to achieve the Fed’s goal of 2% inflation.

The market is betting that the Fed will not change its target rate at the September meeting.  So if any further rate increases come, it will have to happen near the end of 2023 or in 2024.

But there will come a certain point where the Fed won’t consider a rate hike.  The discussion will be whether to decrease its target rate.  Or perhaps the discussion will be how far to drop rates.

The Fed is in “fighting inflation” mode right now, but we know how quickly things can change.  Things did briefly change earlier this year when Silicon Valley Bank failed.

As soon as a major recession hits or a financial crisis hits (likely both), the Fed will all of a sudden shift course and no longer be too concerned with price inflation.  They will go back to monetary easing to save the major banks and to attempt to stop the economy from imploding.

We are in this position because of massive government spending and the Fed’s willingness to finance the deficits by creating money out of thin air.  There is going to be trouble ahead no matter what.  It is just a question of timing and how the Fed deals with the problem.

Not Too Hot, Not Too Cold

I think the Fed likes the consumer price inflation report.  They want price inflation to come down slowly towards their 2% target.  But they also don’t want it to happen too quickly because of what it signals.

If price inflation all of a sudden comes in very low, or even below zero, it will be a sign of reduced consumer demand.  It means that people are tight with their money and a recession is likely coming.

Zero price inflation would be better for most of us because a recession is coming anyway.  The yield curve is, amazingly, still inverted.  It has been all year long.  At least we could start benefitting from not paying higher prices than what we are already paying.

So maybe the Fed likes this Goldilocks scenario, but it isn’t going to last.  We are going to get a hard recession anyway.  So it would be better if we start the correction sooner rather than later, and it would be better to start paying prices for consumer goods that aren’t continually rising.

Stock investors seem to be immune to any financial news these days.  Stocks keep doing well for the bulls.  It is easy to get complacent during these times and think that everything will just keep on humming along.

The bond market is telling a different story, and it has been for all of 2023.  The higher short-term yields against lower long-term yields are telling us that this isn’t going to last.  I am still looking at a recession starting before the 2024 election.