KEY DATA: PPI: +0.5%; Excluding Food and Energy: +0.3%; Energy: +4.1%; Goods: +0.8%; Services: +0.4%/ Claims: flat

IN A NUTSHELL: “The days of falling prices are pretty much over and the labor market is strengthening, which raises the question, is anyone at the Fed paying attention?”

WHAT IT MEANS: A lack of inflation and a softening of job gains worried the Fed at its June meeting. Well, as usual and not surprisingly, conditions have changed. Wholesale prices jumped in June as energy costs surged. But it wasn’t just oil as the increases were spread across just about every category of goods and services. You have to look hard to find any grouping that posted a decline in costs. That contrasts with just a few months ago when the opposite was true. Looking down the road, the inflation pipeline is beginning to fill as unfinished goods costs jumped as well. While the pathway from producer costs to consumer prices is hardly direct, rising wholesale prices are clear signs that the disinflationary pressures created by falling energy prices and the rising dollar have dissipated sharply.

On the labor market front, the June surge in job growth may be no aberration. Jobless claims remained at record lows, when adjusted for the size of the labor force. Firms are not cutting their workforces and that bodes well for the July employment report.

MARKETS AND FED POLICY IMPLICATIONS: Come out, come out wherever you are! That was the phrase used by kids who played “hide and seek”. (Do kids play that anymore?) The members of the Fed, who fear anything that is not normal and hide from it, may want to peak out from under their rocks. Conditions are changing and two of the Fed’s terror’s, a lack of inflation and a soft labor market, are turning around. The labor market seems to be picking up steam and while inflation is not likely to surge, a steady upward drift in the rate should be sustained. And if oil can get to $50/barrel, we are likely to see the top line inflation number reach the Fed’s 2% target. That could happen in the fall. In addition, the path to Brexit looks like it could be long and tortuous as new British prime minister Theresa May indicating she will not trigger Article 50 to leave the EU until the end of the year. That may be wishful thinking, but it points out that the process could be drawn out. If it is, the uncertainty will be extended but there will be more time to address the issues. Is the Fed really going to wait for months while this issue runs its course? If not, then the Fed should start focusing once again on the domestic economy. The FOMC members may not know second quarter growth at the July 26, 27 meeting, but no matter how solid it turns out to be, one quarter of growth would not be enough to force a rate hike. But signs that the economy is rebounding would matter if job growth is sustained in July and August and inflation continues to trend upward. That could put the September meeting in play, though I am not banking on that. As for the markets, with indications the economy is in good shape, we should see equity investors smiling and bond buyers fading. Then again, the political conventions are coming, reminding us that the economy and the markets still have to contend with the political uncertainty.