The Consumer Price Index (CPI) numbers were released for July 2024, which were mostly in line with estimates.  The CPI showed prices increased 0.2% for July.  The median CPI showed an increase of 0.3% for the month.

The year-over-year CPI now stands at 2.9%.  The median CPI stands at 4.3%, which tends to be a less volatile number.

Now the financial media can run headlines that say inflation is below 3%.  Some will say that inflation has “eased”.  Some headlines will say that inflation is coming down.  The only thing that is coming down is the rate of price inflation.  But prices are still going higher.  They are still going higher at a rate greater than the Fed’s 2% target.

To say that inflation is coming down is highly misleading.  If anyone says that general prices are coming down, that is downright false.

What if I had personal debt and said that it is coming down because I had accumulated less debt than last year?

For example, let’s say I had $20,000 in credit card debt at the start of the year.  I had accumulated $5,000 of debt in the previous year.  At the end of the year, I have $22,000 in debt, which is up just $2,000.  My rate of debt accumulation went down from the previous year.  I only added 10% this year.  The previous year I had added 33% ($5,000 on top of $15,000).

Should I celebrate and tell people that my debt situation is improving?  My rate of debt accumulation is going down.

Most people would think this is insane because I am still adding more debt.  I am just making the problem worse from what it was.

The same goes for price inflation.  If the CPI is accurate and prices have gone up 2.9% over the last year, is that an improvement?  Sure, it is better that they have gone up 2.9% versus something like 6%, but that is nothing at all to celebrate.  That 2.9% is on top of the already much higher prices.

It’s not as if prices are up 2.9% from 2020.  They are up 2.9% from the already ridiculous prices that we saw in 2023.

CPI Weighting

Some people accuse the CPI data of being inaccurate.  I think that is the case too, but I also find it useful.  It is useful to see the trend on what is happening.  I don’t subscribe to what I think are exaggerations of it being vastly understated.  I don’t think price inflation is running at 15% per year.  If this were the case, prices would double in less than 5 years.  There may be some items that have doubled in the last 5 years, but that isn’t most things.

The biggest problem for the CPI for me is that it is understating some very important things like shelter (rent and home prices) and insurance.

Car insurance and homeowners insurance have gone up a lot.  For some people it has been 20% or more in just a year.  If you get a 3% raise in wages at your job, the whole thing could be eaten up just from the increased cost of car insurance and homeowners insurance.  Throw in health insurance and I think the increase in wages is all eaten up just by these things.  It doesn’t even begin to account for increased prices in cars themselves and food at the grocery store and at restaurants.

Overall, the standard of living for the average American has gone down in recent years.  Quite simply, wages have not kept up with rising consumer prices.  It is hard to keep up with car insurance premiums that go up several hundred dollars in just a year.

This has to be a factor in the coming election.  People know they are struggling.  They just don’t know where to point their finger.  Of course, the president and Congress play the role of spending the money, but the unelected Fed members are the ones who have financed the deficit spending over the years.

The Coming Fed Decision

The markets generally liked the news of the CPI.  Stock indexes were higher on the day.  They have somewhat recovered from the tumble they took more than a week ago.

The Fed has a meeting in September.  The big question is whether the Fed will lower its target rate.  With stocks having stabilized and the CPI coming in near what was expected, I don’t think there is an obvious answer.  Most likely the Fed will lower by 25 basis points.

But to decrease rates while price inflation, according to government statistics, is still running above 2%, seems to not make sense.  What happened to the Fed’s thing about wanting to average 2% over time?  If that’s the case, we should see price inflation well below 2% for several months before the Fed should consider dropping rates.

This just shows that the Fed will always side with inflation.  They don’t want hyperinflation or runaway inflation, but they always want some price inflation.

If we hit a recession and price inflation is still above 2%, the Fed will clearly go on the side of a looser monetary policy.  We aren’t even in a recession yet (that we know of) and the Fed is talking about lowering rates.

This is why it is a good long-term bet to own physical assets.  There will likely be some asset deflation in the near future as the economy goes into recession, but the only thing that Congress knows how to do is spend more money and issue regulations.  The only thing the Fed knows how to do is manipulate interest rates and create money out of thin air.

This is why we will likely never have a deflationary depression, or at least not one that lasts long.  As long as the Fed isn’t faced with losing control of the dollar, the Fed members will side with inflation as a general policy.