KEY DATA: CPI: +0.2%; Over-Year: +2.2%; Less Food and Energy: +0.2%; Over-Year: +1.8%/ Hourly Earnings (Monthly): 0%; Over-Year: +0.4%/ NFIB: +0.7 point

IN A NUTSHELL: “Even with strong job gains and exuberant small business owners, inflation remains at reasonable levels.”

WHAT IT MEANS: The labor market is booming, so is that translating into higher wages and prices? It doesn’t look like that is the case. Consumer prices rose moderately in February, led by another surge in apparel costs. Despite two consecutive months of large increases, clothing prices are up only minimally over the year, so don’t make too much of the gain. Housing expenses continue to rise and it cost more to eat out, insure you vehicle and buy medical products. But food, fuel, vehicle and hospital services prices were either down or flat, so the price pressures were not that widespread. Unfortunately, feeding my passion for cakes, cupcakes and cookies continued to cost me a lot more. Excluding the more volatile food and energy components, consumer prices rose moderately as well.

Rising inflation continues to take its toll on household spending power. Hourly earnings and prices both rose at about the same pace, so inflation-adjusted or real earnings were flat in February. That is, consumer spending-power went nowhere. Over the year, household earnings gains were also nearly wiped out by inflation. Workers did make more on a weekly basis, but that was largely due to working longer hours. As I say all the time, it is hard for the economy to boom if households don’t have the money to spend, and most don’t.

Small business owners are about as happy as they have ever been. The National Federation of Independent Business’ Index of Small Business Optimism rose in February and now sits at the second highest level in its 45-year history.   Taxes are no longer a major concern. Finding qualified labor is the number one issue. Firms expect to invest and pay higher wages. Indeed, the capital spending index was the highest since 2004. In a warning to the Fed, firms are raising prices already and a growing number are planning to increase prices going forward.

MARKETS AND FED POLICY IMPLICATIONS: The Fed is meeting next week and will have to decide whether or not to continue its interest rate normalization policy. The members will be looking at a variety of factors, but they can be summarized simply: Is growth strong and is inflation moving back toward its target? The answer on both accounts seems to be yes. Clearly, the February jobs report indicates that the economy is in very good shape. Today’s consumer price data tell us that inflation is nearing the magical 2% rate, but is not accelerating sharply. The NFIB survey is the report that should catch the FOMC members’ attention. Actual and planned price increases are back into historically normal levels after being depressed for the past decade. Firms seem to feel this is a good time to expand and they expect to get higher prices as they do so. There is little reason for the FOMC to hold back on increasing interest rates at the March 20-21 meeting and I expect it to do so. As for investors, the rise in the Consumer Price Index was not so great that inflation fears were stirred up. In addition, bond rates have stabilized, though at significantly higher levels than we had at the end of last year. Until there is a reason to panic, it looks as if equity investors will stay the course. Whether that is just economy-based exuberance or irrational exuberance is something that will be determined in the months to come.