KEY DATA: CPI: 0%; Over-Year: 1.7%; Ex-Food and Energy: +0.1%; Over-Year: +2.4%/ Real Wages: 0%; Over-Year: +1.2%/ Claims: -10,000
IN A NUTSHELL: “Limited inflation pressure gives the Fed some room if the divided committee can manage to come up with an agreement.”
WHAT IT MEANS: Clearly, the economy is not growing too fast for firms to keep up with demand. Otherwise we wouldn’t have consumer costs rising so modestly. The Consumer Price Index was flat in September and removing the volatile food and energy components left us with only a minimal gain. Food prices broke a string of three consecutive flat months with a limited 0.1% increase. Not much pressure there, unless you are eating out or, as in my case, you like cakes and cupcakes. They are up way too much since September 2018 and the cost of feeding my bakery sweet tooth is getting out of hand. Energy prices, meanwhile, fell sharply. About the only places where inflation is an issue are medical care and shelter. So, as long as you don’t have to see a doctor or live in a house or apartment, there is basically no inflation.
With overall inflation flat and wages going nowhere, it was hardly a surprise that inflation-adjusted, or real wages were also flat. The over-the-year rise keeps moderating and that is not good news for future consumer demand. Worse, hours worked have declined over the past year and that has meant a slowdown in weekly earnings growth. In other words, household spending power is not rising fast enough to support strong consumption unless families dip into savings and it is not clear they have any inclination to do that.
The sharp drop in jobless claims last week reinforces the view that the slow job growth is due more to a lack of supply than a faltering in demand.
MARKETS AND FED POLICY IMPLICATIONS: No inflation really does little to change the feelings of either investors or Fed members. For investors, it is all about trade and tariffs. Indeed, the idea that a “more puff than pastry” agreement, something I have argued was the most likely agreement if the two sides ever manage one, is now considered to be the last great hope for the markets. It is becoming quite clear that a major trade agreement with China is nowhere in sight if it is even possible. Signs of progress (however that is defined) or backpedaling lead to major ups and downs in the markets. Since that yo-yo effect has been going on for quite some time, I can repeat another of my favorite sayings: The markets may be efficient but that hardly means they are rational. Right now, investors are simply grasping for any hope that a total meltdown doesn’t happen. As for the Fed, the data do not support a rate cut and they haven’t for months, so I don’t know why I even discuss that. The minutes from the last FOMC meeting indicate that the only thing driving rate cuts is tariffs. But the Committee is extremely divided with just about every view, from sharp reductions to nothing being represented. Does Jay Powell have an insurrection on his hands? I don’t think we can go that far just yet, but making additional moves is becoming harder and harder. I expect no more cuts this year, despite what the markets think.