KEY DATA:  CPI: +0.9%; Over-Year: +5.4%; Ex-Food and Energy: +0.9%; Over-Year: +4.5%/ Real Hourly Earnings: -0.5%; Over-Year: -1.7%/ NFIB: +2.9 points

IN A NUTSHELL: “Inflation and optimism are sky high, but spending power is cratering.”

WHAT IT MEANS: One of the greatest concerns, at least for consumers, is that inflation is soaring.  We saw again today, just how great a problem that is, at least right now.  The Consumer Price Index surged in June.  On a year-over-year basis, the rise was the second largest in nearly thirty years, beaten out by the gasoline price surge in 2008.  Excluding food and energy, you must go back to November 1991 to see any annual price increase greater.  Clearly, there are some special factors at work.  Used vehicle costs are up by 45% since last June, as the global supply chain is not working well.  Gasoline and fuel oil have also skyrocketed by a similar amount.  But while eating out is a lot more expensive, eating in costs have been tame, though that has been changing in the last few months.  Interestingly, health care costs, both goods and services, have been a restraining inflation.  Normally, it would be leading the way up.  Also, despite the surge in home prices, shelter expenses have been increasing at a moderate pace.  We need to be cautious in jumping to any conclusions about the yearly rise in consumer prices due to the price declines created by the shutting down of the economy.  That said, Since March 2020, before the pandemic impacts were felt, the headline index is up 5% while the core (ex-food and energy) has risen 4.2%.  In other words, inflation is soaring, and it is not just a statistical anomaly.

The problem for households is that their incomes are just not increasing nearly as rapidly as their expenses.  Adjusting for inflation, hourly wages fell sharply both over the month and over the year.  People are working more now but enjoying it less.

Despite the inflationary pressures on costs, small businesses are exuberant.  The June National Federation of Independent Business’s index rose solidly and the level is nearing the peaks seen after the 2016 election and the passage of the tax cuts.  But firms are having major problems filling open positions, raising costs and forcing firms to increase prices.  The percent raising prices hit its highest level since 1981 and no one who lived through that time period wants to go through that again.     IMPLICATIONS: “The heat is on, it’s on the street” and the question is, will the Federal Reserve cops (yes, that is the song from Beverly Hills Cops) keep smiling and saying that transitory factors are driving the rise and they will dissipate and everything will be beautiful sometime in the future, whenever that sometime will be? But for workers, the surge in consumer costs is eating heavily into their spending power.  That is happening as states are trimming their unemployment compensation and the supplementary payments will terminate nationally in September.  Where households will get the money to keep spending as we move through the later portions of this year and into next is anyone’s guess.  While the strong job gains mean overall income will continue to increase, high or even moderate inflation, coupled with mediocre wage increases could limit consumption for those already working, and that is the bulk of the workforce.  But investors seem to think the Fed is totally correct that inflation will fade to trend and therefore don’t seem to be adding that issue to their decision making.  Given the markets tend to be cynical about Fed forecasting, to me this attitude looks like cherry picking those things that help keep the market going and discounting anything that doesn’t support that view.  That approach could persist for quite a while as we have no idea what the time frame the Fed has in mind when it says that inflation pressures are transitory.