KEY DATA: CPI: -0.2%; Excluding Energy: +0.2%; Gasoline: -9%; Real Earnings: +0.1%/ Claims: 255,000 (down 7,000)

IN A NUTSHELL: “Outside of energy, inflation is already at more normal levels.”

WHAT IT MEANS: Since inflation has generally been the Fed’s major worry, the September Consumer Price Index should provide some clues to the direction of consumer prices. Household costs fell in September, led by another sharp decline in gasoline prices. Excluding energy, price rose moderately. Indeed, over the year, consumer prices are up 1.9% when just energy is excluded from the index. That is not to say gasoline and fuel oil don’t count: They most definitely do. But it is not very likely that energy commodity prices will fall over the next year by the 30% they dropped in the past year. As for the details of the report, they were mixed. Food prices are bouncing back. Critically, cake and cupcake prices jumped. I was devastated. After solid increases in August, apparel and medical care expenses declined. We are still seeing a drop in used car costs, the result of so many vehicles being traded in for new ones. And finally, the services segment of consumer costs continues to accelerate. Few may focus on this grouping, but it does constitute over 60% of the index. Over the year, non-energy related services costs are up 2.7%, which is hardly tame. Shelter is leading the way, which shouldn’t surprise anyone trying to rent an apartment.

The declining consumer prices helped keep household spending power from falling in September. Real hourly earnings rose slowly as the modest decline in wages – which was odd -was more than offset by the drop in prices.

Unemployment claims fell to the lowest level since November 1973. Adjusting for the labor force size, we are at historic lows. Clearly, the labor market is continuing to tighten.

MARKETS AND FED POLICY IMPLICATIONS: One of my favorite phrases is: “The answer to all economic questions is: It Depends!” That is so true when it comes to the question: Is inflation too low? It depends upon which index you use. If you use the top line CPI number, it appears that consumer costs are going nowhere. But the huge fall in energy costs, which is the prime factor in the low inflation rate, is not likely to be repeated. Excluding that wildly volatile commodity, low inflation is not an issue, unless you expect similar massive declines in oil prices going forward. If, over the next year, energy prices are flat and we get the exact same changes in all other categories, next September’s inflation rate would be 1.9%. That is why many are saying that the Fed’s inflation target could be reached next year.   Indeed, the tight labor markets are already driving up wages. Over the year, real hourly wages rose by 2.2% in September. In September 2014, the yearly gain was only 0.4%. With the unemployment rate likely to fall below 5% soon, wages will be rising a lot faster next year. Will rising wages trigger higher inflation? That is really the issue the Fed is struggling with and how the members answer that question will determine when they start to increase rates.