KEY DATA: Sales: +0.6%; Excluding Vehicles and Gasoline: +0.5%/ CPI: +0.2%; Excluding Food and Energy: +0.2%/ Real Hourly Earnings: -0.2%

IN A NUTSHELL: “The slow and steady rise in inflation continues and with consumers spending, firms should be able to sustain those price increases.”

WHAT IT MEANS: Another day, another indication that consumers are back out shopping ‘ill they’re tired and inflation is steadily accelerating. Retail sales rose strongly in June and it wasn’t simply because gasoline prices were up. The increases were spread across a variety of categories. The nice weather got people out fixing up their homes, visiting malls, replacing old furniture and playing sports. When they got tired, they shopped online and hit the supermarkets so they could barbecue. Clothing store sales fell, but prices were down. The only weak segment was restaurants, which appear to have hit a major slow spot after years of solid increases. Core retail sales, which exclude the more volatile vehicle and gasoline purchases, rose strongly, pointing to a very solid second quarter consumption number.

On the inflation front, prices continue to rise in a steady manner.   Energy costs were up but electricity prices fell, likely reflecting the lag in cost declines and price reductions. The strong vehicle sales took their toll on used car prices as a flood of trade-ins showed up at dealerships. Food prices fell in the supermarkets but rose at restaurants. Services costs were up sharply, led by medical expenses. Excluding food and energy, consumer prices were up 2.3%, the eighth consecutive month this measure has been above the Fed’s 2% target. The overall index, though, continues to show no signs are acceleration and remains in the 1% range.

Real hourly earnings fell in June, a real disappointment for workers. Wages were flat and with prices rising moderately, worker income purchasing power.

MARKETS AND FED POLICY IMPLICATIONS: A rebounding consumer and rising inflation should provide the Fed with some reason to discuss the possibility that maybe the members might consider a rate hike sometime in the future. Since this Fed sees only evil and when good shows up, it’s viewed as transitory and is dismissed, don’t expect a sudden rush of members saying that the fears expressed at the June FOMC meeting may have been overblown. The members are more concerned that there are other surprises out there that they don’t know about (which is why they are surprises) and so they have to keep their guard up.

Fed Policy Commentary: I am concerned about the Fed’s current approach and here is why. There are two major risks the Fed faces if it sticks with its no/slow rate hike policy. The first is the traditional one, that inflation accelerates past its target. I suspect most Fed members could live with inflation above 2% for an extended period. They can always raise rates quickly and don’t forget, there is no upper bound to interest rates – think Paul Volcker. The doves continue to discuss inflation and its low level.

But there is a second risk: The expansion entered its eighth year and is getting old. Brexit is a prime example of things that can go wrong. The Fed members used Brexit as an excuse to stand pat. But that is not the right way to look at it. If Brexit causes the EU to split apart, which I don’t think will happen, it could send Europe into recession and that could lead to a U.S. recession. What tools would the Fed have to fight that recession? Not the interest rate tool. Instead, we could be back into a world of quantitative easing. Will we need QE4,5,6,7,8,9 or whatever? Will QE work the next time around? This is the risk that the Fed is discounting and the reason I am so outspoken about the need to raise rates every chance possible, not just when the time is perfectly right.