CPI: What Direction Will Prices Move in Q4 and Q1 as the Fed Eases?

Today’s CPI reading is essentially irrelevant. For those keeping track the Fed’s key measure – Core CPI – came in at 3.2% (well above the Fed’s target) and accelerated on a month-to-month basis to 0.3%.

• The Fed obviously was not aggressive enough in fighting price inflation given its muted approach to QT (see our latest QT graphic HERE).

• The money supply is the key to price inflation. The Fed grew M2 by approximately 40% from January 2020 – April 2022. Given such growth in the money supply without commensurate growth in productivity, it would have been impossible for the U.S. economy to not suffer price inflation.

• To fight inflation, the Fed needed to shrink the money supply by aggressively paring its balance sheet. The Fed has failed to do so. The Fed grew its balance sheet from $4.2 Trillion in January 2020 to $8.9 Trillion in April 2022 (a 112% increase), yet the Fed has reduced its balance sheet to only $7.1 Trillion as of last week (a 20% decrease from the April 2022 peak).  

• Prices could soon be headed higher as the Fed eases. Then what?