KEY DATA: CPI: +0.1%; Excluding Food and Energy: +0.1%/ Real Hourly Earnings (Monthly): 0.1%; Real Weekly Earnings (Monthly): +0.4%

IN A NUTSHELL: “The Fed has to decide if modest inflation is good enough.”

WHAT IT MEANS: The slow water torture the Fed is putting us through continues unabated and it would be nice if the economic data helped stop the pain. No chance. The Fed has a dual mandate and while the economy is good enough to raise rates, inflation remains well below target levels. Today’s July Consumer Price Index report does nothing to change that picture. Prices rose minimally and that included energy and food. That is, you can exclude energy or food and energy, and there was just a modest rise in consumer costs. Interestingly, the Bureau of Labor Statistic has gasoline prices rising solidly in July but the Energy Information Agency has gasoline costs down a touch. What the government’s left hand is posting has little to do what the right hand is presenting. Regardless, there remains a clear demarcation between goods inflation and services inflation. Since July 2014, commodity prices, which are about 38% of the index, were down 3%. Energy commodity costs dropped over 22% over the year. Meanwhile, the services component, the larger portion of the index, was up 2.2%. Shelter, especially rent, is rising sharply. As for the specific categories, medical care costs, both services and commodities, is rising faster than most other areas. Food price pressures are increasing and it is not just eggs. New vehicle prices are up but used are down. The high demand for new vehicles is putting a lot of used vehicles on the market. Clothing prices rose in July, but that was probably an aberration as they are down over the year. Basically, consumer price pressures exist, but they are not great and are concentrated in services, where there is less volatility than in the commodities segment.

With prices up modestly but hourly and weekly earnings up more solidly, real earnings rose. Workers are seeing gains in pay, but more of it is coming from longer hours worked rather than higher hourly wages.

MARKETS AND FED POLICY IMPLICATIONS: The battle between the Fed’s growth mandate and the inflation mandate continues unabated. Under normal circumstances, the Fed would simply wait until inflation starts approaching its target rate before raising rates. But this is not a normal situation. Rates are well below “normal” levels and it is no longer clear that the low level of rates is doing more good than harm. The argument du jour against a rate hike, which is likely to be just ¼ percentage point, is that it would cause the dollar to skyrocket, killing tourism and wrecking the junk bond market. Huh? I guess since people have thrown just about everything else against the wall, those worried that a Fed mini-move would cause the world as we know it to collapse, have to come up with even more bizarre rationalizations to argue against a rate hike. All these excuses are the best arguments to raise rates. Perceptions of what are high rates have been so totally warped that the Fed is playing catch up. It’s time to act, if only to bring some semblance of normalcy back into the fixed income markets.