The latest CPI numbers came out, slightly better than expected.  For May 2025, the CPI was up 0.1%, with the year-over-year now at 2.4%.

The median CPI for May came in at 0.2%, which is a lower reading than we have seen in a long time.  The year-over-year median CPI sits at 3.5%.

Prices aren’t going down.  They are still going up – by 2.4% per year if we trust the government’s statistics.  The rate of price inflation is going down, but prices are still going higher on top of the already high prices we have seen.  But many will celebrate this news and say that inflation is going down.

The economic picture seems to be looking up after a couple of brutal months.  In April, there was major turmoil in the equity markets, largely because of Trump’s erratic tariff policy.  Things have seemed to calmed down, and the markets are going back up near their all-time highs.

But we are still facing higher tariffs than we were three months ago, and you have to imagine there have been a lot of supply disruptions and misallocation of resources with businesses trying to figure out what they can and can’t feasibly import and export.

The Balance Sheet and the Yield Curve

The other statistics don’t lie.  They still don’t look good for the economy ahead.  It will be amazing if Trump can somehow manage to get an economy that at least bumps along.

The Federal Reserve’s balance sheet is still going down in accordance with its current policy.  It is still over $2.5 trillion higher than it was at the beginning of March 2020.  But it has also gone down by about $2.3 trillion since its peak in 2022.

In other words, we are still in monetary deflation mode, in spite of what is happening with interest rates.

The yield curve was mostly inverted for 2023 and most of 2024.  It has slowly begun to normalize.  The 30-year yield is just under 50 basis points (half a percentage point) higher than the 3-month yield.  That isn’t much, but it also isn’t inverted any longer.

Mr. “Too Late” Powell (Trump’s nickname for the Fed chair) is probably too late by establishment standards.  It may or may not be a political thing, but it is a bit surprising that the Fed hasn’t been more aggressive in lowering its target rate.  When the Fed does resume with its rate lowering, it will drive down short-term yields.

The yield curve and the monetary deflation are signaling a recession ahead.

Is it possible that this economy will defy the odds?  Will the trend break and we somehow won’t get a recession?

I can’t say it is impossible, but I also can’t deny the reality that these are indicators of a recession.  In spite of the strong equity markets over the last few weeks, I am still expecting a recession ahead.