Markets banking on the Fed

INDICATOR: September Producer Prices/August Case-Shiller Home Prices

KEY DATA: PPI: -0.1%; Excluding Food and Energy: +0.1%/Case Shiller (20-City Index): +1.3%; Year-over-Year: +12.8%

IN A NUTSHELL: "The consumer is spending money at a decent pace and hopefully that will extend past the government shut down into the holiday shopping season."

WHAT IT MEANS: When it comes to inflation, there doesn't seem to be a whole lot of to worry about. Wholesale prices eased in September even though energy prices were up. Food costs, which had been on the rise, took a sudden downturn and that helped greatly. There have been some really wild swings in vegetable prices, which rose by nearly 28% in August and then plunged 18% in September. I guess that is why the core index excludes both food and energy. Without food and energy, prices increased just a smidgeon. As for capital goods, they were up moderately but there had been little change for several months. Looking down the road, there are also almost no inflation pressures to be seen anywhere. Whatever increases in energy that had occurred have been wiped out recently.

While wholesale costs are tame and imply limited consumer price inflation, the beat goes on when it comes to housing prices. The August S&P/Case-Shiller home price index was up robustly once again. All twenty of the metropolitan areas in the index were up over the month and thirteen rose by double-digits over the year. There has been some deceleration in the gains but they still remain high.

MARKETS AND FED POLICY IMPLICATIONS: With the markets now banking on the Fed, inflation remains the one issue that could cause major concern for the monetary authorities. Most of the members can breathe easily for an extended period of time. There is little reason to fear inflation getting out of control. Wholesale costs are going nowhere and with energy production continuing to rise in the United States, consumer prices should remain tame as well. Yes, it is theoretically possible that the massive excess reserves will be turned into loans in short order and the resulting surge in demand will create inflation. As I said, it is theoretically possible. But where the pricing power would come from to allow firms to raise prices in this global economy is anyone's guess. So, if the FOMC wants to take its time beginning its tapering process, it can do so with minimal economic worries. Of course there are still some U.S. Senators who would like to create mischief with the Fed but that is a different story.