Inflation fears inflated

INDICATOR: January Consumer Price Index, Real Earnings and Weekly Jobless Claims

KEY DATA: CPI: +0.1%; Excluding Food and Energy: +0.1%/Real Earnings: +0.1%/Claims: 336,000 (down 3,000)

IN A NUTSHELL: "Some Fed members may be worried about inflation but from the look of things, those concerns seem well into the future."

WHAT IT MEANS: Yesterday we saw that at the last FOMC meeting, the Fed members started discussing how to approach guidance on raising the funds rate. If anyone thought a rate hike was going to happen soon, they haven't been paying attention to the inflation numbers. Basically, there still is little or no pricing power in the economy. Consumer prices edged up in January and largely because the brutal winter caused heating costs to soar. There was a rebound in medical commodity prices, but that came after an even larger decline in December, so we cannot say there is renewed pressures in that component. Otherwise, prices went essentially nowhere. Even food costs, which we saw were rising at the wholesale level, didn't increase a whole lot. I do expect that to change in the coming months. Sweetrolls, coffee cakes and donut prices soared, a real concern since I love my Entenmann's chocolate covered donuts when I am snowed in. I've eaten a lot of those this winter.

Tame consumer prices are really helping keep household's above water. Real (inflation adjusted) hourly and weekly earnings continue to grow minimally and the change from January 2013 to January 2014 was a meager 0.4%. Maybe someone should show that number to all those individuals who cannot understand why the economy continues to grow at a disappointing pace. Will compensation rise faster soon? It all depends upon the labor market and we need to see jobless claims, which did fall a little last week, come down faster. That would imply strong job gains, a lower unemployment rate and ultimately faster worker income growth. At current claims levels, we will likely see a moderate rise in payrolls but a stable unemployment rate.

MARKETS AND FED POLICY IMPLICATIONS: Low inflation, not high or rising inflation, remains the major concern for the economy. It is below desired levels and there is no reason to think that will change greatly anytime soon. The January economic numbers and the continued cold, snow and ice in February point to a soft first quarter growth rate. That would keep hiring down a little. So let's hope the groundhog doesn't know what it is talking about and spring comes sooner rather than later for lots of reasons. Most importantly, we are likely to see a major rebound in growth, once people pay off their heating bills. That would add to confidence, which has been holding in despite all the issues facing households. As for the markets, I suspect investors are looking for any reason to support the current high prices and a decline in jobless claims and limited inflation which would make it easy for the Fed to postpone any tightening are examples of that.