Inflation totally under control

INDICATOR: September Consumer Price Index/Real Earnings

KEY DATA: CPI: +0.2%; Year-over-Year: 1.2%; Excluding Food and Energy: 0.1%; Year-over-Year: +1.7%/Real Earnings: 0.0%; Year-over-Year: 0.9%

IN A NUTSHELL: "Inflation is totally under control and that is the only reason household spending power hasn't totally collapsed."

WHAT IT MEANS: Inflation is becoming the Big Foot of economic concepts: It gets sighted once in a while but no one has shown it exists. Okay, I am being prone to a little hyperbole here, but my point is simple, consumer price pressures are not a major concern right now. The Consumer Price Index did rise moderately in September but it was due to a surge in energy costs. That has already been largely backed out in October. Excluding energy, costs only edged up a touch with almost all segments posting no or limited gains. Food prices were flat, apparel was down sharply, vehicles were up modestly and even health care didn't post much of a rise. In other words, inflation is tame across the board.

The limited rise in consumer prices is the one thing that is sustaining the economy. Real earnings - earnings adjusted for inflation - are going nowhere. Between September 2012 and September 2013, household spending power has increased by less than one percent. If inflation had been higher, we would have had no or even negative real earnings growth. It is hard to get strong consumption growth when people don't have any additional money to spend. Yes, I say that every month, but it is worth repeating.

MARKETS AND FED POLICY IMPLICATIONS: I know that sometimes data can be a pain. Too many policymakers don't let facts get in the way of a good political or even economic stand. Well, when it comes to monetary policy, some Fed members should start accepting that inflation is not only not a major concern but it is actually going in the wrong direction: It is decelerating to lower than desired levels. The FOMC will issue a statement this afternoon and I suspect the low inflation, in combination with the chaotic fiscal policy, will cause the monetary authorities to essentially say that they will wait and watch what happens before deciding when to start tapering. The economy will have to get a lot better, especially with inflation so low, before quantitative easing will be moderated. The problem, though, is the usual: Growth will not accelerate until wages rise faster and wage gains will not accelerate until the unemployment rate falls about another one percentage point. In other words, we are likely to have disappointing growth for another year, especially if Washington continues to tighten the reigns on spending. As for investors, weak wage gains are great for two reasons: It helps keep profits growing and it forces the Fed to continue feeding the beast. Wall Street and Main Street are going in totally opposite directions right now.