KEY DATA: PPI: +0.1%; Goods Excluding Food and Energy: +0.1%/ Claims: -3,000

IN A NUTSHELL: “The tame inflation is causing the Fed to reconsider its normalization path.”

WHAT IT MEANS: Inflation, where art thou? With the unemployment rate near, at or even below full employment, the assumption has been that accelerating wage pressures would appear. That hasn’t happened so far. And it doesn’t look like consumer costs will jump anytime soon either. Wholesale prices increased minimally in June as rising food costs were offset by declines in energy prices. The details, though, were not quite as clear as to the extent of inflation in the economy. Stepping back and reviewing the many subcategories and special indices, few are showing any decline in prices. That indicates a floor is being set on wholesale prices. Finished consumer food prices are rising fairly sharply and that gets passed through quickly. Finished consumer goods excluding food and energy are also increasing at a moderate pace. And while all finished consumer goods prices were up modestly in June, they are 2.7% higher than they were last June. Meanwhile, producer services costs are increasing at a pace that, while not high, can hardly be considered as minimal. Services are nearly two-thirds the index, which is important since intermediate services prices are increasing significantly. That implies that we should see the pressures on services continue in the months. Goods costs are rising sharply at the crude level, but it is a long and winding road from crude to finished goods, so it would be premature to say producer costs are going to rise sharply in the future.

Jobless claims decreased a little last week. The level is low and given the lack of available workers should remain near or at historically depressed levels for quite a while.

MARKETS AND FED POLICY IMPLICATIONS: Fed Chair Yellen, in her semi-annual testimony to Congress on monetary policy this week, hinted that a continuation of low inflation might allow the Fed to limit the increase in interest rates. If inflation remains restrained, what economists call the neutral funds rate, which is when the Fed is neither stepping on the brake nor accelerator, would also be low. That adds even greater import to the inflation data. Right now, there isn’t a lot of pressure on prices. Firms may have large numbers of job openings and great difficulty finding qualified workers, but they have yet to find it necessary to raise wages faster to attract workers. The recently declining energy costs have helped corporate bottom lines, providing further flexibility on the labor side. And what was the strong dollar had helped restrain import prices. Inflation is still low enough that the Fed has some flexibility in its rate and balance sheet normalization process. Looking forward, though, the declining dollar needs to be watched and the path of both energy and food costs is critical. But most importantly, if firms can maintain their limited pay increase policy in the face of the huge number of job openings, there will be minimal pressure to raise prices. Thus, the Fed may be able to go more slowly than had been expected, at least before this week’s testimony. That should buoy investors’ confidence.