KEY DATA: CPI: 0.0%; Over-Year: +2.2%; Ex-Food and Energy: +0.2; Over-Year: 2.2%/ Real Hourly Wages: +0.3%; Over-Year: +0.8%
IN A NUTSHELL: “Inflation remains in the Fed’s sweet spot.”
WHAT IT MEANS: If the Fed is worried about inflation, it shouldn’t be – either on the upside or the downside. That is, inflation is neither too hot nor too cold. Bring on the porridge. Consumer prices went nowhere in November, which hardly surprised anyone given that gasoline prices cratered. There was also a sharp drop in apparel expenses. Prices did rise a bit more than expected for a variety of goods and services, including utilities, medical costs, new vehicles and at restaurants. Since November 2017, consumer costs are up 2.2%, a pace that the Fed could live with for a long time. Even excluding the volatile food and energy categories, inflation rose at the exact same rate. In other words, inflation is right where it should be.
With hourly wages rising moderately and inflation flat, real, or inflation-adjusted wages rose solidly in November. However, over the year, the increase remains below one percent, which is hardly enough to generate much additional spending on the part of most workers. I suspect wage gains will accelerate, but so could inflation. Thus, household spending power is not likely to rise significantly in 2019.
MARKETS AND FED POLICY IMPLICATIONS: While some may blame the Fed for the wild ride in the markets, the real culprit is trade fears. I think we see that clearly as anytime concerns that the U.S./China trade battles will turn into a full-blown war, the markets crash, but when hopes reemerge that there will be some kind of agreement, the markets soar. Meanwhile, the Fed plods along and it should. Inflation is right where the members want it and the economy is still growing solidly. After ten years, doesn’t it make sense that interest rates should be back to normal levels? Yes, and that is why the Fed is raising rates and should continue raising rates. Maximizing equity returns is not a Fed mandate and in any event, the risk is trade not rates. Meanwhile, the important questions are not being asked of Chair Powell: What is a neutral funds rate and how do you determine what that rate should be? Without that knowledge, how can we determine if any given funds rate is well below, near or above normal? The Fed Chair must be a little bit more forthcoming about “neutral” if that term is to have real meaning. Right now, it doesn’t. Indeed, given the Chair’s recent inconsistent comments about the distance we are from neutral, it is not clear he knows what neutral is. So, if the Fed is creating any issues, it isn’t because they are raising rates to levels that are too high. It is that they have a failure to communicate effectively.