INDICATOR: August CPI/Real Earnings
KEY DATA: CPI: Up 0.1%; Excluding Food and Energy: up 0.1%/Real Earning: up 0.1%
IN A NUTSHELL: "The best part of low inflation is that the minimal rise in earnings is not being totally destroyed by rising prices."
WHAT IT MEANS: Inflation is hardly anywhere to be found. Consumer prices edged up modestly in August as both food and energy expenses were under control. Looking at the details, costs were largely flat except for medical care goods and services. But even the health care sector is posting relatively limited increases, especially when you look at past history. Meanwhile, energy costs actually backed off a touch and food prices only inched upward. With wholesale and imported food costs rising, people may be in for a small shock in the months to come, though. The one place where inflation is accelerating and the trend should continue is shelter. The firming housing market is putting pressure on rents. Consumers are benefitting from a total lack of inflation in the goods portion of the economy. Services are where prices are rising and they are not soaring by any means.
My favorite indicator right now is earnings and they actually rose a little in August. An increase in both hourly wages and the workweek led to a gain in weekly earnings that was not totally offset by the small increase in inflation. However, we really need a lot faster gain in household income if consumption is to accelerate. Right now, households are buying new vehicles and homes but little else. They are borrowing money for the big-ticket items and given that inflation adjusted weekly earnings are up only 1% over the year, there is little left over to buy anything else.
MARKETS AND FED POLICY IMPLICATIONS: The FOMC starts its two-day meeting today so it is logical that the markets temporize for the next day. The drive to start tapering is not being fueled by economic growth, which remains tepid, or inflation, which is below desired levels. Instead, it is the likely the consequence of the incessant bleating of inflation hawks who fear the markets will be damaged and inflation will surge. As for the market damage part, how waiting a few more months would do anything more than has already been done, if anything has been done, is unclear. On the inflation front, the idea that there will be enough pricing power on the part of businesses to lead to a huge jump in prices can only come from a belief that banks will suddenly find lots of "good loans" and make them. I suspect that not too many of the Central Bankers who think that way actually worked for a bank. In any event, we will know tomorrow whether the Fed will start tapering, by how much and what might be the time frame for ending quantitative easing. Of course, we also may know none of that tomorrow afternoon. And if the Fed does start the process, the markets will begin building in the next move, which will be the topic of discussion until the Fed makes the move. It never ends. Yes, Fed watching is just a game but one with major market implications.