The latest consumer price index report came out for October 2023. The numbers came in slightly below expectations, which drove stocks higher.
The CPI was flat for the month of October, while it was expected to rise 0.1%. The year-over-year rate now stands at 3.2%. Overall prices keep going higher, but at a slower pace than before.
The median CPI, which tends to be less volatile, was up 0.3% for October, while the year-over-year stands at 5.3%.
Again, price inflation is not coming down. The rate is coming down. Prices are going up at a slower pace than before.
The Bulls are Happy, For Now
U.S. stocks boomed on the news. Stock investors tend to like inflation, so you may be wondering why this was taken as good news for stocks. The reason all goes back to the Fed.
If price inflation is coming under control, then that means the Fed is less likely to hike its target federal funds rate. It also means the Fed is more likely to stop its monetary deflation earlier. So, investors are banking on a loose – or at least a less tight – monetary policy.
I think the stock bulls are right about the monetary policy going forward, but they are interpreting it wrong. We will see a looser monetary policy as compared to now because the economy is going to go into a recession. That may be putting it mildly. With rates having gone up so fast, and with an inverted yield curve for 2023, we may be looking at a major financial crisis in the near future. And if that happens, stock investors are going to get the loose monetary policy that they wanted.
The problem is that we will be in a financial crisis, or at least a bad recession. This isn’t good for stocks. It typically isn’t good for asset prices in general. If the Fed is aggressive enough after the crash, then stocks could turn around. But it won’t be before they take a major beating.
The Fed May Win Against Inflation, Temporarily
Price inflation is still above the Fed’s target of 2%. They will ignore what they said a few years ago about trying to average 2% over time. They never specified what time period, but shouldn’t that mean that we will go under 2% for a while to average out to 2%? It was just over a year ago that price inflation topped 9% year-over-year.
We have seen short-term rates go above 5% along with a declining balance sheet. This is all in the face of an inverted yield curve.
I think Americans are still suffering terribly from price inflation. Car insurance prices are up nearly 20%, which tends to be a fairly big line item in most people’s budgets. Wages are simply not keeping up with consumer prices. The reason that some prices are starting to stabilize is simply because consumers don’t have the money to buy as much. They have to prioritize their needs. And with some needs, such as food, they find cheaper substitutes.
The Fed will be successful in bringing down the price inflation that it created (with the help of the federal government). The problem is the next side effect (recession/ financial crisis). Then the problem is the Fed’s reaction swinging the other way. So, we may get back to much higher price inflation again, but not before we see major economic turmoil.