Income and Consumption Up, Inflation Down. Time To Party?

by: David Andrew Taylor

The perfect world. Money is rolling in at a pretty good clip.... People are spending at a pretty good clip.... And, the inflation indicator attached is pointing sharply lower. It's the 90's all over again...

... except, wait a second, what was that one thing in the Fed Statement that we were supposed to be cautious about? Wasn't it resource utilization? And aren't incomes, which moved up a whopping 1.0% last month and another 0.6% this month, resource utilization?

Here... Just a subtle reminder:

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures

I've gone ahead and put the most crucial part in italics, underlined it, colored it red, and then put it in bold just so it would stand out appropriately.

But, I'm sure that an individual that wrote a book on Inflation Targeting, and even titled it Inflation Targeting, probably won't even bat an eyelash to this release. Mere nothingness. A whole giant bowl of nothing more than air.

real PCE real PCE

If you read yesterday's posting on PCE vs. the S&P 500, you knew that there's going to be a whole lotta buying on Friday. And, if your antenna is focused only on the smallest amount of information possible to make your argument work your way, and no other, then this release is all a bowl of red, ripe cherries.

Although I may sound a bit pessimistic, I'm more cautious, that's all. I don't think we're out of the woods just yet. I'm trying hard to believe the Fed right now. If they are right, then the economy moves forward at a relatively firm clip, albeit less than full potential. I see no reason at this point for employment to come down. It looks set to remain firm. I'm just not 100% sold on inflation, regardless of the above chart, to moderate. It's not the price of goods on the first tier. It's the resource utilization, i.e. the employment costs. As prices have risen, people are turning to their employers to help alleviate the pinch of these higher costs. The employers are going to have to turn to their customers to make up this increase.

As long as resource utilization remains contained, then the Fed has no reason to move rates... either up or down. And then you have the perfect world... all with requisite red, ripe cherries in a bowl.