KEY DATA: CPI: -0.3%; Energy: -3.8%; Excluding Energy: +0.1%/Real Hourly Earnings: +0.6%; Year-over-Year: 0.8%

IN A NUTSHELL:  “Falling energy costs is a gift that we hope keeps giving.”

WHAT IT MEANS:  The continued decline in oil prices may not be the greatest thing since sliced bread, but it is close.  Yes, some energy-related companies are being hurt and there are a few countries whose economies may slip into recession if prices remain low, but for consumers, it is nothing but great news.  Another sharp drop in energy prices caused the Consumer Price Index to fall in November.  Falling clothing costs helped as well.  And with new vehicle purchases jumping, it is not surprising that more used vehicles are available and their prices are declining.  Still, there were some places where prices seem to be firming.  Medical care expenses, both services and commodities, are beginning to accelerate.  Shelter costs are up, though not that rapidly.  We are also seeing a rise in transportation services and tuition, of course.  Food costs have become better behaved, especially for the critical cakes, cupcakes and cookies category.  One final point needs to be made: Services inflation is running at a moderately high pace, with costs up 2.5% over the year.  This component is over 60% of the index.  The only way inflation to remain contained is for commodity costs to stay low, or as it was in November, actually down.  Any rise in commodities would push consumer costs up above the Fed’s target.

The fall in consumer prices is helping household spending power.  Real hourly earnings jumped in November, but over the year the increase remains below one percent.  That pretty much explains the lethargic nature of consumer spending.

MARKETS AND FED POLICY IMPLICATIONS:  The Fed will be coming out with a statement today and this report should have little impact on the members’ thinking.  Inflation, excluding energy, is still just below the Fed’s 2% target, so there is room to maneuver.  But the Fed is not likely to focus on the restraining impact that declining oil prices has on inflation and instead consider the effects on consumer spending.  Barring a large rise in oil prices next year, households will have a lot more money left in their wallets and if there is any acceleration in wages, consumption could be very strong.  Conditions could be in place to raise rates during the first half of next year.  Whether the FOMC opts to do that is unclear, but the idea that the Fed should set monetary policy based on concerns about energy-impacted economies doesn’t sit well with me.  Indeed, the oil drop can only help Europe and Japan.  Regardless, we will know soon enough what the Committee is thinking so I will leave it at that.